Berkshire Hathaway (BRK.A 0.53%)(BRK.B 0.16%) CEO Warren Buffett is arguably in a league of his own when it comes to investing. He's grown his net worth from around $10,000 in the mid-1950s to $109 billion today (note, this doesn't count the $37 billion he's generously donated to charity since 2006), and his company's stock has averaged an annual return of 20% since 1965.
But in spite of these supercharged returns, Buffett and his investing team aren't infallible.
Berkshire Hathaway currently owns 48 securities (46 stocks and two exchange-traded funds), many of which are fantastic investments that you could put money to work in right now. However, three Buffett stocks stand out for all the wrong reasons. While all three of these companies could make for solid investments at some point in the future, they're wholly avoidable in June, and probably the rest of 2021.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Snowflake
Though there are bound to be plenty of groans given how popular it is among growth stock investors, the first Buffett stock to steer clear of in June is cloud data-warehousing company Snowflake (SNOW 0.94%).
To be fair, Snowflake is doing plenty of things right, which is why it's attracted such a loyal following among growth-seeking investors. Sales were up 110% in the fiscal first quarter from the prior-year period, and it delivered a net revenue retention rate of 168%. This means existing clients spent 68% more year-over-year.
Snowflake also offers clear-cut competitive advantages. For example, its solutions are layered atop the most-popular cloud infrastructure services, such as S3 and Azure. This allows Snowflake customers to seamlessly share data, even across competing platforms.
The company also shuns subscriptions in favor of a more transparent pay-as-you-go model. Businesses pay based on the amount of data they store and the number of Snowflake Compute Credits used. This lets its clients better manage their expensing.
So, why avoid Snowflake if the company is growing lightning-fast and it offers clear competitive advantages? The biggest issue is justifying its current valuation. Even factoring in Wall Street's expectation of 88% full-year sales growth this year, Snowflake is currently valued at a multiple of 66 times sales. What's more, it's still valued at 19 times Wall Street's consensus sales if you look four years into the future. That 19 times sales multiple is where most cloud stocks are valued relative to current-year revenue.
Furthermore, value stocks have a tendency to outperform growth stocks during the early stages of an economic recovery. That's because investors usually place added emphasis on bottom-line results when exiting a bear market and/or recession. For Snowflake, it'll probably be another three or four years before it turns the corner to recurring profits.
It's an intriguing company with a bright future, but it's simply not worth the nosebleed premium.
Image source: Getty Images.
Charter Communications
Another Buffett stock to avoid like the plague in June is residential and small business cable, phone, and broadband provider Charter Communications (CHTR 8.35%).
Like Snowflake, Charter has been a wildly successful investment for Berkshire Hathaway. A quick look at the company's first-quarter operating results shows more than 31.4 million customer relationships (most of which are residential), with a steady uptick in internet customers. Charter gained approximately 2 million new internet customers over the past 12 months.
But there's a lot not to like about Charter, as well. For example, cord-cutting is threatening one of its core segments. Its total video subscribers have declined from 16.46 million in the first quarter of 2019 to 16.06 million in Q1 2021. That may not sound like much of a drop-off, but when combined with stagnant voice customers, the percentage of residential customers with a triple-play package (internet, video, and voice) has plunged from 30% to 22.2% in two years. This represents a decline of one of Charter's highest-margin subscription packages.
Something else that's worrisome is how the company has been growing its bottom line. While we often cheer on shareholder return programs, Charter has taken share repurchases to the next level. It repurchased $12.1 billion worth of its common stock in 2020 and another $4 billion in the first quarter of 2021. The bulk of the company's earnings growth is coming from buybacks and not organic expansion.
This leads to the final point: valuation. Even though Charter is getting less expensive thanks to aggressive share buybacks, it still doesn't make a lot of sense to pay 25 times Wall Street's forward-year consensus earnings for a company growing by just 4% to 5% annually.
Charter's shares have effectively tripled in the trailing five-year period, but it's growing at a snail's pace and using buybacks to do most of the heavy lifting. There are far better growth or value stocks you could be putting your money into at the moment.
Image source: Getty Images.
Kroger
The third Buffett stock to avoid like the plague in June is grocery giant Kroger (KR +1.04%). The Kroger family of companies includes, QFC, Fred Meyer, Food 4 Less, Smith's Food and Drug, and of course, Kroger, to name a few prominent brands.
The beauty of the supermarket model is that it's generally predictable. This is to say that supermarkets purchase a number of inelastic goods that will draw in shoppers no matter how well or poorly the economy is performing. For instance, people are always going to need to food, toilet paper, toothpaste, and detergent. For a grocer the size of Kroger, this sets a base level of cash flow to expect every year.
Kroger was also a big-time beneficiary of the coronavirus pandemic. With people staying home more than ever before, cooking at home became commonplace. In a historically slow-growing industry, Kroger registered 14% sales growth in 2020, excluding fuel. The company's Restock Kroger initiative, which emphasizes online ordering, really helped streamline purchases during a difficult year.
The problem is that 2020 is about as good as it's going to get for Kroger. Eventually, higher prices for the goods it sells and an uptick in higher-margin discretionary purchases will push Kroger's sales and per-share profits above what was achieved in 2020. However, we're likely many years away from seeing that happen.
Looking to fiscal 2023, Kroger is valued at 13.4 times Wall Street's consensus earnings per share. While this might sound like value stock territory, it's not for a company whose sales are likely to go sideways for years to come. This is a low-margin, highly competitive industry. Short of a massive and sustainable uptick in digital sales, maintaining its current valuation will be difficult, if not impossible.
