The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B).

All you can eat Buffett
Everyone seems generally pleased with Berkshire Hathaway's decision to eat its own cooking yesterday. My fellow Fool -- and occasional sparring partner -- Morgan Housel likes the buyback plan. The stock rose sharply yesterday on the news, so Mr. Market clearly agrees.

Let me raise some eyebrows and prompt a few sneers by saying the five words that nobody wants to hear: Warren Buffett is cheating you.

I do feel better getting that off my chest, though I'm picking up on a "who let that guy in here" buzz in the back.

Everything that you have read about Fooldom is true. We are required to be branded with "I Love Warren Buffett" tattoos on arrival. Our first paychecks come stapled to "Munger Mania" bumper stickers that we need to affix to our cars, fridges, or flame-retardant suits.

Several of our newsletters and real-money portfolios are bullish on Berkshire Hathaway, so obviously my opinion here is solely my own. After a few laser removal sessions, I'm down to "I Love War" brandished on my chest. Yes, that's yet another thing I want to get off my chest.

Why am I so appalled by this well-received initiative?

Well, let's start with the message it conveys. This isn't a traditional company where idle cash is best served returned to shareholders if it isn't earmarked for corporate purposes. Folks buy into Berkshire Hathaway because they want to buy into the portfolio that Buffett and Charlie Munger have assembled. They want the next GEICO or Dairy Queen. They want opportunistic stakes in public companies. How is buying its own stock -- at a price as much as a 10% premium to book value -- going to help justify a premium to book value?

I get it. Berkshire Hathaway is trading at a historically low price-to-book ratio. The conglomerate's shares have fallen sharply since their February highs. Then again, many of its holdings have fared even worse. Why not just double down on them?

Berkshire Hathaway closed at a nearly 18% premium to its book value of $98,716 for every Class A share at the end of June. We'll know in a few weeks how hard the summer sell-off has hit Berkshire's book value, but it wouldn't surprise me if yesterday's pop on the buyout news prices the stock at a double-digit premium to its current book value. In other words, the market's reaction to the buyout will be what precludes the buyout. The irony's so thick that it can coat some See's Candies peanut brittle.

Buffett wouldn't dare buy Berkshire shares for more 10% of book -- despite the bullish disclaimer that "the underlying businesses of Berkshire are worth considerably more than this amount" -- yet investors are likely doing what Buffett himself would not.

I love War? You know it.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Wal-Mart (NYSE: WMT): Instead of leaning on the entire universe of stocks to find my portfolio replacements, I am going to pick from the 14 companies that Buffett held at least $1 billion worth of at the start of this year. Let's start with Wal-Mart. The discount department store that Sam Walton built has been in a funk lately. The chain's stateside stores have posted nine consecutive quarters of negative same-store sales growth. Thankfully it's holding up better overseas, pushing the retailer's performance higher. The stock is also a good value here with its earnings multiple in the pre-teens and its patience-rewarding 2.9% dividend yield.
  • Coca-Cola (NYSE: KO): Let's go with another blue chip trading at a historically cheap multiple and with a chunky payout to boot. Remember when the pop star was trading at insane P/E ratios a decade ago? Well, it's now down to the more reasonable teens. Is there something to be said about rival PepsiCo's (NYSE: PEP) more diversified salty snack lines and its superior Gatorade to Coke's "me too" Powerade? Sure, but Coca-Cola has led the way with fortified soda and bottled water. Coca-Cola finally isn't expensive, and the 2.8% yield isn't too shabby.
  • Procter & Gamble (NYSE: PG): I'm going to sidestep the problematic financial stocks and patent-ticking drugmakers in Berkshire's arsenal to go with another consumer stock for my third replacement. Procter & Gamble is the company behind Gillette razors, Crest toothpaste, and Iams cat food. Top-line growth at Procter & Gamble hasn't been overly impressive, but now that the company is letting attrition eat into its ranks of senior executives, there should be room for margin expansion in the coming year or two.

I'm sorry, Buffett. If you can't be more creative with your money, shareholders will just have to do it for you.

The Motley Fool owns shares of Coca-Cola, PepsiCo, Wal-Mart Stores, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, Wal-Mart Stores, PepsiCo, Coca-Cola, and Berkshire Hathaway; and creating a diagonal call position in PepsiCo and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.