"I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars."
-- Warren Buffett, from 2008 letter to shareholders.
Super-investor Warren Buffett has made plenty of investing mistakes. He's also never been shy about talking about them; to the contrary, his must-read annual letter to shareholders will often spend more time pointing out his flubs than crowing about his successes. And since even the Oracle isn't infallible, we asked three of our contributors to name a stock that's in the Berkshire Hathaway Inc portfolio today that investors might not want to buy.
There are a lot of reasons why it might not make sense for Berkshire to sell these stocks -- especially The Coca-Cola Company (NYSE:KO) and American Express (NYSE:AXP) -- such as the huge tax consequences of selling today, and the dividends it gets, as two examples. But just because Berkshire shouldn't sell, doesn't mean these are stocks you should buy.
Here's what our contributors had to say about these big Berkshire holdings, and why the stock they discuss won't be a market-beating investment going forward.
Dan Caplinger (Wal-Mart): Buffett is a smart investor, but his investment in Wal-Mart (NYSE:WMT) has been a less-than-stellar pick. Buffett finally made a smart decision late last year when he cut back on his holdings of the big-box retail giant, but his sale of about 4.2 million shares only reduced his position by about 6%. The company remains among Berkshire's top-10 holdings.
Yet Wal-Mart has continued to struggle, and shows few signs of finding a viable strategic vision. The company chose to end its Walmart Express concept, with which it hoped to compete against increasingly popular dollar-store retailers. In the membership-club retail niche, Sam's Club has underperformed its main rival for years. Even with efforts to bulk up its online e-commerce abilities, Wal-Mart faces pressure from rivals that have no legacy store footprint to manage.
Buffett is a long-term investor, and he's done a good job of capturing some of Wal-Mart's long-term growth from earlier in its history. Where Buffett often struggles is in choosing whether to make a sale. With Wal-Mart seeing ongoing pressure on growing comparable-store sales, and facing big challenges, being a long-term holder of the stock just doesn't seem like the best use of Buffett's capital right now.
Brian Feroldi (American Express): Buffett has called American Express one of his "big four" investments, and Berkshire has minted billions off of its long-term ownership of this stock. While there is no question that American Express has been a wonderful business to hold, there are reasons to believe that the company's moat may no longer be as wide as it once was, which could be a reason for Buffett to consider paring back his massive position.
What's going wrong? Simply put, the company's brand name no longer commands the premium market position that it once did and intense competitive pressure is causing the company's longtime customers to defect.
Two big customers recently dumped American Express as a partner -- Costco and JetBlue -- which is going to take its toll on the company's finances, and inhibit its ability to grow. Losing Costco as a customer was an especially big deal, as the company comprised roughly 20% of its total loan book.
To help counteract the coming declines, American Express' management team announced that it will be downsizing, and has a goal of saving $1 billion a year by 2017. That's all well and good for the short term, but I fail to see how cutting spending will be a long-term solution to restoring the company's competitive position.
Looking ahead, management believes that the company will earn between $5.40 and $5.70 in 2016, but for 2017, it's calling for earnings of "at least" $5.60 per share. That indicates that investors will see little to no growth during at least the next two years. Given that, its hard for me to believe that American Express' stock will be a market beater over the long term, even from today's value price.
Jason Hall (Coca-Cola): Like American Express, The Coca-Cola Company has made a lot of money for Berkshire Hathaway, and pays the company gobs of cash every year in dividends. But at the same time, there's a lot of reason to wonder if Coca-Cola is likely to be the market-crushing long-term investment going forward that it has been for Berkshire during the past 20 years.
After all, consumer tastes are changing. Not only are the company's flagship Coke and Diet Coke products losing popularity, but the entire segment is in decline, with volumes having fallen yearly for most of the past decade. So far, the company has been able to overcome the decline by expanding into new growth segments, continued international growth, price increases, and cost cuts. It's hard, however, to picture a scenario that allows Coke to be a stock that can outperform the market going forward.
Don't get me wrong -- it remains a great company, and its iconic brands will remain relevant and in demand for years and years to come. But that's not enough reason to make it a great long-term investment, or a stock that I'd want to buy today.