Warren Buffett is widely regarded as one of the best investors of all time, and it isn't hard to see why. His holding company Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.14%) has returned an average of 20.1% annually since 1965, almost double the S&P 500 average. But past performance doesn't necessarily reflect future performance, and some companies in Buffett's portfolio aren't pulling their weight.
Let's discuss why Sirius XM (SIRI 1.92%) and Kraft Heinz (KHC 0.13%) shouldn't be on your investment radar.
Sirius XM
Sirius XM is a satellite radio company that became a practical monopoly after merging with its only rival in 2008. Berkshire owns the stock indirectly through its various stakes in Liberty Media, which controls 81% of its equity. But despite its high-profile backers, Sirius is performing poorly, with its shares down a whopping 37% in 2023 alone.
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At first glance, it isn't hard to see why Buffett and company might like Sirius. Because of the merger with XM Satellite Radio (to form the company we know today), it controls the entire North American satellite radio market. While traditional radio provides competition, Sirius's economic moat is as deep as they come. Due to technological limitations, rivals simply can't replicate its audio quality and breadth of channels.
Despite its advantages, Sirius isn't generating much value for investors.
Management expects 2023 revenue to remain flat at $9 billion, not surprising considering uncertainty in the new car market, as challenges like rising rates make financing these big-ticket purchases less affordable. More importantly, with a new car penetration rate of 83%, the company may have already reached the saturation point for its business.
Like many mature companies, Sirius XM returns value to shareholders through buybacks, repurchasing $639 million of common stock in 2022. But with the stock down so much, it's hard not to see this as wasted money. Perhaps the company would be better off using its substantial cash flow to create more growth opportunities before its stagnant business becomes a declining one.
Kraft Heinz
Down 7% year to date, Kraft Heinz is a multinational food company known for cheese products and condiments. Berkshire is one of the company's largest backers, controlling almost $13.3 billion worth of its shares -- a position Buffett admitted to overpaying for in a 2019 interview.
As with the Sirius position, it is easy to see why Kraft Heinz fits Buffett's investing philosophy. The company boasts well-known food brands that have been around for decades. And with a price-to-earnings (P/E) multiple of 14.2, it seems cheap compared to the S&P 500 average of 21. But when you buy a company, you also buy its debt. And with a whopping $19.3 billion in long-term debt, Kraft Heinz isn't as affordable as it looks. It also seems to be on the wrong side of evolving consumer tastes.
According to NPR, consumers are increasingly moving away from classic packaged food brands in favor of online shopping or cheaper store brands. Further, new trends toward healthier food choices are also taking a bite out of Kraft Heinz's business model. What investors are left with is a heavily indebted business with limited growth prospects. And while it could limp along indefinitely, it's nothing to get excited about.
Has Buffett lost his touch?
Warren Buffett has historically outperformed the S&P 500 (including in 2022) by focusing on value stocks with strong economic moats. But that doesn't mean his investment strategy always works. While companies like Sirius XM and Kraft Heinz fit Buffett's criteria, their abysmal growth prospects seem to be holding back their performance. The Oracle of Omaha may not have lost his touch, but don't copy all his investments.
