Buffett may have a long-standing friendship with Microsoft founder Bill Gates, but Buffett has amassed a huge bet on the future of Apple. Berkshire Hathaway is the third largest shareholder of Apple after Vanguard and BlackRock. While the Apple stake was listed as worth $57.6 billion in the latest earnings report, the real issue is that Apple’s share price is now down almost 40% from its peak of 2018.
Buffett used to shun technology companies. Now he is willing to buy, but a very mixed bag from his IBM investment and the recent drop here are adding pressure to Berkshire Hathaway’s investment portfolio. In fact, that $57 billion Apple valuation recorded in 2018 was worth less than $40 billion in the second week of 2019. Not many investors can claim that they have lost $20 billion in just one stock.
Bank of America (and Merrill Lynch)
Bank of America Corp. (NYSE: BAC) was a $26.5 billion stake in Berkshire Hathaway’s last earnings report. Buffett actually increased his stake during 2018, just in time for bank and financial stocks to slide lower. After the first week of 2019, the value was closer to $22 billion.
Bank of America’s fate is tied directly to peers and competitors. The whole banking sector was weak heading into 2019, and it remains up for grabs whether the Federal Reserve’s quest to raise interest rates will (or already has) led to “overshooting” on a new neutral rate policy target. An inverted yield curve, where short-term yields are higher than intermediate-term ones, can signal woes for the banking community because they pay out more short-term than they may earn in their longer-term investments.
The pool of analysts had a consensus target price of $33.87 at the start of 2019. What is odd is that this is actually higher than its multiyear high of $33.05. And to make matters worse, the stock would have to rally almost 33% to hit that target.
Before thinking that Buffett is losing his shirt for shareholders here, it is important to consider that this was a big post-recession stake that was from convertible debt at far lower share prices.
Coca-Cola Co. (NYSE: KO) is another position that Buffett has owned for decades. His cost-basis after adding in dividends may even be close to zero now, when you add up all the money that Berkshire Hathaway has received in dividends. The value of this 400 million share stake was listed as $18.5 billion on the most recent Berkshire Hathaway earnings report.
Unlike some of the bank and technology stocks, Coca-Cola is a defensive stock by nature, and the company also has moved beyond just Coke (which Buffett drinks daily) into more water and healthier sport beverages. And Coca-Cola shares were even trying to stage an upside technical breakout above $50 before sliding in December with the broader market.
It remains unclear if Buffett, or his successors, would ever consider selling off the stake in Coca-Cola. The stock’s consensus target price at the end of 2018 was $51.66, after a 3% gain in 2018. That is above its 52-week and all-time high of $50.84, and if analysts are correct that recent sell-off might help investors make close to 10% more in 2019. One issue to consider here is that Coca-Cola shares are valued at 21 times annual earnings expectations.
Kraft Heinz Co. (NASDAQ: KHC) is supposed to be defensive since it is the top company in packaged foods, but many consumers have shifted toward more natural product offerings that may be lower in sodium and fat (and fewer ingredients that are hard to pronounce). This stake is also considered to be outside of the normal book-keeping in Berkshire Hathaway’s public equity holdings due to its classification.
Berkshire Hathaway owned more than 325 million shares of Kraft Heinz common stock at the end of September. This represented 26.7% of the outstanding shares, and the fair value with the latest earnings report was roughly $17.9 billion.
The problem here is that Kraft Heinz shares have been cut in half from the $90 share price of mid-2017. It is not normal for a historically defensive stock to see its shares drop that much. It goes without saying that this retreat has been far more than Buffett would have expected.
Wells Fargo & Co. (NYSE: WFC) used to be Buffett’s largest equity holding of all his stocks. He had even been adding to the stake for years and years. Wells Fargo’s account opening scandal and other business practice issues that came to light in the past two years hurt the stock. At the start of 2018, this was a $65 stock, but it was closer to $46 at the end of the year.
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