Even the greatest investors get things wrong from time to time, and billionaire Warren Buffett certainly isn't an exception. In this Fool Live video clip, recorded on Aug. 30, Fool.com contributors Matt Frankel, CFP, and Jason Hall discuss why Berkshire Hathaway's (BRK.A -0.70%) (BRK.B -0.64%) investment in Kraft Heinz (KHC 1.19%) went south and why, even at a lower share price, both ranked it rather low among Berkshire's top 10 holdings.
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Matt Frankel: This is actually probably the least successful investment on here for Berkshire. It's down significantly. Warren Buffett admitted he overpaid. This originated because Berkshire Hathaway was one of the primary owners of Heinz, and then when they merged with Kraft, now, Berkshire owns roughly a quarter of the company. I want to say it's 26% to be exact.
Jason Hall: I think that's right. Yeah, it's less than 30, but it's more than 25.
Frankel: But Kraft Heinz ran into a ton of problems not that long ago. They had some financial reporting issues, things like that, really drove the company down, and like I said, Buffett really admitted he overpaid. This is, I think, the biggest position in the portfolio in terms of percentage ownership in the stock portfolio.
Hall: I don't think it's even close.
Frankel: Yeah, I think AmEx (AXP 0.04%) is up there, is in the 20% ballpark. But Kraft Heinz is 26%. I know, Jason is curious now and is looking it up.
Hall: I'm looking it up.
Frankel: But the reasons Buffett liked Kraft Heinz in the first place are obvious brand power; they have a portfolio of food and beverage brands that are untroubled.
Hall: Oh wow, we were both wrong.
Frankel: Go ahead.
Hall: I'm not going to tell. I'll just say we will get to it when we get further up the rankings, I'll drop it in there.
Frankel: They are the biggest, right?
Hall: Kraft Heinz is the second biggest.
Frankel: I think I know what the first is, OK.
Hall: American Express is actually No. 4 behind Liberty SiriusXM (LSXMA -0.43%).
Frankel: I ranked Kraft Heinz No. 7, you ranked it No. 9. My big reason for my ranking is I would've ranked it worse, but I think it's more of a value play right now. I think it's a good value if they can grow and turn things around and keep it going.
Hall: Yeah, I rated it lower because I think it's cheapish, but for a reason. It gets back like we were talking about U.S. Bank versus Wells [Fargo] (WFC -2.19%), where Wells is cheap for a reason right now. But it's the turnaround side, so I think it's more of a turnaround. Consumer tastes have changed, and it was surprising how quickly we saw...let's get a little deeper into it.
There were some real problems with the business when they merged, trying to drive out costs. The big idea was they were going to take these two companies that do a lot of the same things and sell to a lot of the same customers and wring out costs and get more efficient and grow cash flows that way, and it just hasn't completely worked.
At the same time, they're swimming upstream, where consumer tastes are changing, and it's a commodity business that's tough, and the winners are the ones that are at scale. I'm not completely convinced that this is a business that is going to generate meaningfully market-beating returns without executing perfectly. I'm not sure I believe they can do it.
Frankel: Yeah, I would definitely agree with that. You won't see this in my portfolio anytime soon, but I see why Buffett doesn't want to sell. It seems like the risk–reward from his standpoint at this time of selling at a loss is, it's worth holding onto.
Hall: I agree because I think that's the thing. We have to think about the philosophy of managing this portfolio, in the Berkshire portfolio, and at the end of the day, you own a business like Kraft Heinz... What is the purpose it serves? The bottom line is you think about for Berkshire, it's to add value over time, and generating a return from income to dividends is the long-term story here, and the benefit of selling and then having to redeploy all of that capital, where do you deploy it? I think right now is the time where Buffett is probably struggling with thinking about great ideas to deploy capital into the equity market.