Warren Buffett’s company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), invests in many top blue chip stocks. They are mainly centered around financial services, consumer goods, and oil and gas. And while there may be some changes in smaller positions within Berkshire’s holdings, the top 10 stocks don’t normally see a lot of turnover.
But with Buffett stepping down as CEO this year, there could be some more significant changes on the way. And there’s a move that Berkshire recently made that stood out to me, one that could signify the end of its position in one of its largest holdings: Kraft Heinz (NASDAQ: KHC).
Image source: Getty Images.
In a press release dated May 20, Kraft announced that its board and leadership team are looking at “potential strategic transactions to unlock shareholder value.” It also noted that Berkshire Hathaway’s two representatives on the board — Timothy Kenesey and Alicia Knapp — would be stepping down.
Thus, at a critical time in Kraft’s business, when the company is struggling to grow (its sales were down 3% last year) and possibly looking at making significant changes, Berkshire appears to be distancing itself from the consumer goods company.
It’s not hard to see why Kraft may need to make a move. Its top line has struggled to grow in recent years, and as the government focuses on healthier eating options and people are using GLP-1 weight loss drugs to shed pounds and curb their appetites, the company’s growth prospects aren’t looking so great.
If Berkshire isn’t involved in these critical strategic decisions, the writing may be on the wall for its investment in Kraft. For years, it hasn’t made a whole lot of sense as to why Kraft remains one of Berkshire’s top holdings. It makes up just over 3% of Berkshire’s overall portfolio, making it the eighth-largest position, behind Occidental Petroleum, Moody’s, and Chevron.
Kraft pays a dividend, which Buffett likes, but it has been a bad investment over the years, even despite the payout. In five years, the stock has declined by 12% and when you include its dividend, the total return is only 10%. That is a pitiful performance when you compare it against the S&P 500, which has more than doubled in value over that time frame when including dividends.
For a forward-looking investor such as Buffett, the future doesn’t look all that promising for Kraft either, whose iconic Mac & Cheese brand has become associated with unhealthy eating habits due to its processed ingredients and high sodium. Given all the question marks around the business, it wouldn’t surprise me in the least to see Berkshire finally exit its position in Kraft. Berkshire and 3G Capital (which has since sold its stake) bought Heinz back in 2013, a few years before it merged with Kraft.
If Berkshire sells its stake in Kraft, that could send the stock into a deeper free fall. But regardless of whether that happens or not, this is a stock that you may be better off avoiding. Simply because an investment is or isn’t in Buffett’s portfolio shouldn’t determine whether you buy or sell it. Ultimately, it’s important to make your own investment decisions based on your own goals and objectives, as they will be different from Buffett’s and Berkshire’s.
And if you’re looking at where Kraft’s business is heading, the outlook doesn’t look terribly promising. Even the stock’s 6% yield may not prove to be safe in the long run, especially if its sales and profits decline. Without more compelling growth prospects, this stock may continue to be a bad buy for the foreseeable future.
Before you buy stock in Kraft Heinz, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Kraft Heinz wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004… if you invested $1,000 at the time of our recommendation,you’d have $656,825!* Or when Nvidiamade this list on April 15, 2005… if you invested $1,000 at the time of our recommendation,you’d have $865,550!*
Now, it’s worth notingStock Advisor’s total average return is994% — a market-crushing outperformance compared to172%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chevron, and Moody’s. The Motley Fool recommends Kraft Heinz and Occidental Petroleum. The Motley Fool has a disclosure policy.
