Berkshire Hathaway (BRK.A -0.28%) (BRK.B -0.68%) CEO Warren Buffett is one of the world's greatest investors. In less than 70 years, he turned a seed investment of around $10,000 into a net worth of $116 billion, as of mid-January. Mind you, this $116 billion figure doesn't account for the tens of billions of dollars the Oracle of Omaha has given away to charity over the years.
Buffett has also handsomely rewarded his shareholders. Between Dec. 31, 1964 and Dec. 31, 2021, he oversaw the creation of more than $600 billion in market value and led Berkshire's Class A shares (BRK.A) to aggregate gains in excess of 3,600,000%!
Buffett's a great investor, but he's not infallible. Even the best investors will be wrong from time to time. Of the more than three-dozen securities Berkshire Hathaway owns in its $350 billion investment portfolio, three stand out as wholly avoidable in 2022.
Berkshire Hathaway CEO, Warren Buffett. Image source: The Motley Fool.
Apple
The first Buffett stock to avoid like the plague in 2022 happens to be the Oracle of Omaha's largest holding, as well as the largest publicly traded company in the world: Apple (AAPL 1.27%). Yes, I really said Apple.
Let me preface this by saying that Apple is a solid company that has an incredibly loyal following. It's the leading provider of smartphones in the U.S., and anytime the company debuts a new device, it tends to have customer lines wrapping around its stores.
Additionally, Apple CEO Tim Cook is overseeing a successful transition of the company from being product-focused to service-oriented. Subscription services should generate higher margins and more predictable cash flow over time, relative to the revenue lumpiness of the iPhone, Mac, and iPad that have replacement cycles.
The problem is that Apple is facing a trio of headwinds in 2022 that it hasn't contended with in a long time.
To begin with, the introduction of 5G wireless infrastructure rolled out the red carpet for consumers to upgrade their wireless devices. This included Apple recording record sales for its first iPhone with 5G wireless capabilities. However, with new iPhone models expected to offer only modest upgrades (e.g., a better camera) over the iPhone 12 (the first 5G-capable model), year-over-year sales comparisons could be extremely challenging throughout 2022.
Secondly, the Federal Reserve is expected to begin hiking its federal funds target rate this year, which will push lending rates higher. Apple has occasionally taken out low-cost loans to repurchase its stock and provide a lift to its earnings per share (EPS). As access to cheap capital dwindles, Apple's share-repurchase program might also pull back a bit.
Third -- and building off the previous point -- a higher-rate environment will make Apple's premium valuation less appetizing. Apple's current forward-year price-to-earnings ratio is roughly 50% higher than its five-year average. However, sales are only expected to grow by a mid-single-digit percentage.
Further, without share buybacks, Apple's EPS could go backwards in 2022. Apple may be a solid company, but there are much better deals to scoop up this year.
Image source: Getty Images.
Kraft Heinz
A second Buffett stock to avoid like the plague in 2022 also happens to be one of Berkshire Hathaway's largest holdings: Kraft Heinz (KHC 1.31%).
The packaged-foods giant actually found itself in the right place at the right time when the initial waves of the coronavirus pandemic struck. With restaurants around the country (and world, for that matter) closing down or reducing hours due to COVID-19, prepackaged meals and snacks became hot items. The hope has been that this increased engagement with Kraft Heinz's core brands would help ignite growth for years to come.
Unfortunately, there are a number of red flags that should keep investors away from Kraft Heinz stock in 2022.
One of the more obvious concerns is that the company's comparable-sales momentum observed in 2020 didn't carry over into 2021. Through the first nine months of 2021, net sales for the company are up only 0.5%, with price increases doing all the work and volume (i.e., product sales) falling by 1% from the prior-year period. The inference is that as COVID-19 vaccination rates tick up, people are getting out of their homes more often and returning to restaurants and/or their pre-COVID routines.
Another very big concern is Kraft Heinz's balance sheet. It's been almost three years since the company took an impairment charge of more than $15 billion against the value of some of its core brands.
Even after this sizable writedown, the company was carrying $31.4 billion in goodwill and nearly $24 billion in total debt on its balance sheet, as of Sept. 25, 2021. This compares to only $2.3 billion in cash and cash equivalents. The company simply doesn't have the war chest that would be needed to reignite interest in its brands.
I'd also caution that Kraft Heinz is at risk of a multiple contraction, with the nation's central bank set to raise rates. Even though the company isn't nominally pricey at a little over 14 times Wall Street's consensus EPS for 2022, the expectation is for both sales and profits to slide this year.
Image source: Getty Images.
Snowflake
The third and final Warren Buffett stock to avoid like the plague in 2022 is cloud-data warehousing company Snowflake (SNOW 2.53%).
Like Apple, I consider Snowflake to be a solid company with clearly defined competitive advantages. For instance, Snowflake's cloud solutions are built atop the most-popular cloud-infrastructure service platforms. Whereas it can be difficult for businesses to share data if they're using competing platforms, Snowflake makes this easy for its users by removing this barrier.
Snowflake has also rejected the popular subscription-based operating model in favor of a pay-as-you-go model that charges customers based on the amount of data stored and the number of Snowflake Compute Credits used. This transparent pricing system allows companies using Snowflake to better control their expenses.
Despite these advantages, I have one glaring concern: Snowflake's ultra-premium valuation.
Traditionally, when the Fed begins raising rates, the multiples for high-growth stocks tend to deflate. Within the cloud-computing arena, virtually no company has a higher price-to-sales multiple than Snowflake. Even factoring in a likely doubling in sales for fiscal 2022 and expected revenue growth (via Wall Street) of 66% in fiscal 2023, Snowflake is valued at roughly 44 times Wall Street's forward-year sales consensus of $2 billion. In fact, Snowflake is still valued at a sales multiple of 9 based on the company's forecast of $10 billion in product revenue by fiscal 2029 (which'll coincide with calendar year 2028). While Wall Street may be forward-looking, this valuation is extra generous.
Furthermore, since the company is aggressively spending on marketing and product development, recurring profitability is still a ways off. There's little question that profitability and relative value will come into focus as lending rates rise.
Again, as with Apple, I don't view Snowflake as a bad company. It's simply not an attractive investment given its valuation and the expectation of Fed tightening. That makes Snowflake worth avoiding in 2022.
