1 big stock investment Warren Buffett got it wrong
Even the biggest investors get it wrong from time to time, and billionaire Warren Buffett is certainly no exception. In this fool live Video clip, registered on August 30, Fool.com contributors Matt Frankel, CFP and Jason Hall explain why Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) Investment in Kraft Heinz (NASDAQ: KHC) went south and why, even at a lower share price, the two ranked it rather low among Berkshire’s top 10 holdings.
Matt Frankel: It is in fact probably the least successful investment here for Berkshire. It’s down significantly. Warren Buffett admitted to overpaying. This is because Berkshire Hathaway was a major owner of Heinz, then when they merged with Kraft, Berkshire now owns about a quarter of the business. I mean it’s 26% to be exact.
Jason Hall: I think it’s right. Yes, it’s less than 30, but it’s more than 25.
Frankel: But Kraft Heinz ran into a ton of issues not too long ago. They had financial reporting issues, things like that, really brought the business down, and like I said, Buffett really admitted he paid too much. It is, I think, the largest position in the portfolio in terms of percentage held in the equity portfolio.
Room: I don’t think it’s even close.
Frankel: Yeah i think AmEx (NYSE: AXP) is up there, is in the approximate 20% stage. But Kraft Heinz is at 26%. I know Jason is curious now and is looking at him.
Room: I’m looking for it.
Frankel: But the reasons Buffett liked Kraft Heinz in the first place are the obvious power of the brand; they have a portfolio of food and drink brands that are not troubled.
Room: Oh wow, we were both wrong.
Frankel: Go ahead.
Room: I’m not going to say it. I’ll just say we’ll get there when we’re higher in the rankings, I’ll drop it in there.
Frankel: They’re the biggest, aren’t they?
Room: Kraft Heinz is the second largest.
Frankel: I think I know which is the first one, OK.
Room: American Express is currently # 4 behind SiriusXM Freedom (NASDAQ: LSXMA).
Frankel: I rated Kraft Heinz # 7, you rated it # 9. The main reason for my rating is that I would have rated it worse, but I think it’s more of a value game right now. I think it’s good value if they can grow, change things, and keep going.
Room: Yeah, I rated it lower because I think it’s cheap, but for a reason. It comes back as if we were talking about the American bank against well [Fargo] (NYSE: WFC), 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 … dig into it a bit.
The company encountered real problems when it merged, trying to cut costs. The big idea was that they were going to take these two companies that do a lot of things and sell to a lot of the same customers and cut costs and become more efficient and increase cash flow that way, and it just didn’t. been the case. completely worked.
At the same time, they’re swimming upstream, where consumer tastes change, and it’s a commodities industry that’s tough, and the winners are those who are on a large scale. I’m not entirely convinced that this is a company that will generate returns significantly above the market without performing perfectly. I’m not sure I believe they can do it.
Frankel: Yes, I would definitely agree with that. You won’t see this in my portfolio anytime soon, but I understand why Buffett doesn’t want to sell. It seems the risk-reward from his perspective right now of selling at a loss is, it’s worth hanging onto.
Room: I agree because I think it is the thing. We have to think about the management philosophy of this portfolio, in the Berkshire portfolio, and at the end of the day you own a company like Kraft Heinz … what is it for? The bottom line is what you think for Berkshire is 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 owing. redeploy all that capital, where do you deploy it? I think at the moment Buffett is probably struggling to think of any good ideas for deploying capital in the equity market.
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