When it comes to investing, Warren Buffett's name is practically synonymous with wealth and success. According to figures in the most recent annual shareholder letter from Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%), the conglomerate Buffett has run for five decades has returned an average of 20.3% for shareholders since the beginning of 1965. That's an aggregate return of over 2,700,000% in 55 years, which absolutely trounces the broader market.
The interesting thing about Buffett is that he's not doing anything any retail investors couldn't themselves do. Finding companies with sustainable competitive advantages and holding onto them for long periods of time requires nothing more than conviction and patience.
But the Oracle of Omaha and his investment team aren't perfect. Of the roughly four dozen securities currently in Berkshire Hathaway's portfolio, three should be cordoned off with yellow tape and avoided like the plague in 2021.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Snowflake
Although this might ruffle a few feathers with growth-oriented investors, cloud data warehousing giant Snowflake (SNOW -1.00%), which went public in September, should be avoided at all costs in 2021.
Berkshire took a private stake in Snowflake just prior to the company going public. This netted Buffett's company more than 6.1 million shares, equating to a little over 2% of Snowflake's outstanding share count. With Buffett not exactly versed on what cloud-based companies do, this investment is almost certain to have been the work of his investing lieutenants, Todd Combs and Ted Weschler.
In terms of the operating model, I can actually appreciate the uniqueness of what Snowflake brings to the table. For instance, its cloud data solutions are built atop many of the most popular infrastructure storage services, like Amazon's S3 and Microsoft's Azure. One of the most common and frustrating issues businesses run into is sharing data across these competing infrastructure platforms. Snowflake resolves this by allowing its customers to seamlessly share data, no matter their infrastructure storage provider.
Likewise, Snowflake's pay-as-you-go payment model should allow high-growth companies to more effectively control their spending on data storage.
The issue is that Snowflake's valuation has been stretched even beyond the most aggressive growth forecasts. While its revenue has the potential to quintuple between fiscal 2021 and fiscal 2024, it's valued at a multiple of roughly 72 times forward-year sales and approximately 27 times sales a full three years from now. Even though software-as-a-service (SaaS) stocks have been given a pass on their bottom lines by Wall Street, Snowflake simply isn't growing fast enough to support an $80 billion market cap.
This is an instance of really appreciating what a business is trying to do, but hating the valuation Wall Street has bestowed on it. Short of a significant pullback, Snowflake should be off-limits in 2021.
Image source: Kraft Heinz.
Kraft Heinz
Another Buffett stock that should be avoided like the plague in 2021 is consumer-packaged goods company Kraft Heinz (KHC 0.85%).
On the surface, Kraft Heinz didn't have a bad 2020. It finished the year higher by 8%, which ever-so-slightly outpaced the performance of the iconic Dow Jones Industrial Average. The coronavirus disease 2019 (COVID-19) pandemic forced people to eat at home more often, leading to an uptick in spending on the company's easy-to-make meals and condiments. In the first nine months of 2020, the company enjoyed an organic growth rate of 6.7%, which was driven by favorable product mix and higher prices.
While this probably sounds great, Kraft Heinz's balance sheet is a mess. Buffett has plainly admitted that Heinz grossly overpaid for Kraft Foods in 2016. Even after a greater than $15 billion writedown on a number of core brands in early 2019, the company is still lugging around close to $33 billion in goodwill that'll probably never be recouped.
What's more, Kraft Heinz's total debt was north of $28 billion at the end of September, compared to $2.7 billion in cash and cash equivalents. Despite the COVID-19 boost in organic sales, Kraft Heinz has minimal capital to reinvest in its brands. It's tried to offload some of its non-core assets to reduce its debt, but hasn't found much in the way of takers. My suspicion is that the company's dividend may need to be reduced further to give Kraft more financial flexibility.
Just in case you needed one more reason to keep your distance, Wall Street's forecasts through 2023 call for no earnings growth and a modest full-year sales decline. Things could very well get worse for Kraft Heinz before they have an opportunity to get better.
Image source: Getty Images.
Biogen
It'd also be a smart move for investors to avoid biotech blue chip Biogen (BIIB -1.53%) in 2021.
For years, Biogen has been a biotech stock staple in portfolios. The company's leading multiple sclerosis (MS) drug, Tecfidera, has been a cash cow capable of generating billions in annual sales.
Further, Biogen is developing aducanumab as a treatment for Alzheimer's disease. An estimated 5.8 million people in the U.S. have Alzheimer's, and there are limited treatment options available for these patients. A Food and Drug Administration (FDA)-approved Alzheimer's drug could be capable of more than $10 billion in peak annual sales.
Similar to the Snowflake and Kraft Heinz stories, this all probably sounds great. But Biogen's two biggest valuation drivers are set to drag down this stock in 2021.
First off, Biogen lost a court battle in June concerning a key patent for Tecfidera. This allowed generic drug developers to launch copycat versions of the drug in August. Biogen had previously expected its exclusivity on Tecfidera to last until 2028. With cheaper versions of the drug making their way to market, Biogen's sales and cash flow will take a notable hit.
Second, aducanumab's prospects to be approved by the FDA aren't looking so hot. In November, a committee of outside experts voted overwhelmingly against the idea that the drug should be approved. Though the FDA isn't required to follow the votes of panels, it more often than not sides with these panel votes. Alzheimer's drugs have a poor approval track record, and it's looking more likely that Biogen's key pipeline therapy won't generate any revenue.
