Why Warren Buffett Just Hit the Eject Button on Consumer Stocks

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Warren Buffett Ejecting consumer stocks
On Sept. 16, 2009, Warren Buffett declared the Great Recession officially over. But is it still over?

In an interview on CNBC back then, the world's most famous super-investor argued that because the economy had "plateaued at the bottom" and could only go up from there, he was once again buying stocks -- and "getting a lot for [his] money." Obediently, the Dow Jones Industrial Average then proceeded to climb 36% over the next three years.

Unfortunately, times change, economies wane ... and it seems Buffett may have had a change of heart.

Recently, Buffett has complained of disappointing performance at some of the more consumer-oriented holdings of his Berkshire Hathaway (BRK-A) (BRK-B) investment vehicle -- stocks such as Johnson & Johnson (JNJ), Procter & Gamble (PG), and Kraft (KFT). Now, in a regulatory filing dated Aug. 3, Berkshire is reporting about a 21% reduction in the amount of consumer products stocks it holds, even as it ups its exposure to banking, insurance, and industrial stocks.

Crunching the numbers earlier this week, Bloomberg concluded that Buffett appears to be reducing his "bets on consumer-products stocks." If that's what he is in fact doing, then this might bode poorly for an economy that depends on consumer spending for 70% of its growth.

Appearances Can Deceive

But the operative word here is "if": If Buffett thinks a double-dip recession is imminent, and if he's selling consumer stocks to avoid taking a hit, that would be bad news for our economy.

But what if Buffett has a different reason for selling his stocks? Some folks think that's a more likely explanation.

Buffett biographer Andrew Kilpatrick, for one, thinks Buffett may be preparing to "fire at an elephant" -- a euphemism referring to the megadeals Buffett has favored when spending Berkshire's cash of late. At the Berkshire shareholder meeting in May, Buffett let slip that he'd been eyeing one big potential acquisition valued at roughly $22 billion. That deal ultimately didn't happen -- but maybe Buffett just needed a bigger gun.


In Search of a Howitzer and an Elephant

It's possible Buffett has been selling off consumer stocks to raise cash for a new big-game hunting expedition. He's certainly got the money for it now. As of its second-quarter report, Berkshire had $40.7 billion in cash and equivalents -- $2.8 billion more than its first quarter.

Whom might he be targeting? Let's assume Berkshire's desired acquisition size is still $22 billion, more or less. U.S. stock exchanges list 78 separate companies valued at $20 billion to $30 billion, putting them squarely in the sights of Buffett's "elephant gun." Here are some of the likely suspects.

• Run for the border: One thing's for sure about Buffett: He's no fitness fanatic. To the contrary, his fondness for cheeseburgers and Cherry Coke is legendary. Now that he has a little extra spending money jingling in his pocket, he might decide to take a look at YUM! Brands (YUM), owner of Taco Bell and KFC.

Buffett's unlikely to balk at health guerillas' objections to fast food. To the contrary, he'd more likely cheer the success Taco Bell has had serving less-than-organic Doritos-flavored taco shells. Still, the stock's at the upper range of his spending limit with a market capitalization of just more than $30 billion.

• Trainspotting for bargains: But I think we can spot a better bargain. We all know how Mr. Buffett loves trains. (What growing boy doesn't?) His purchase of Burlington Northern Santa Fe in 2009 made Berkshire one of the nation's leading railroad operators. Today, for the low price of just $24 billion, he can expand his train set with the acquisition of either Norfolk Southern (NSC) or CSX (CSX). Plus, both stocks sell for P/E ratios of less than 13 -- considerably cheaper than what Buffett paid for BNSF three years ago.

• An insure thing: Still, as much as he loves his trains, Buffett's first love has always been insurance. For this reason, he may be particularly interested in insurer AFLAC (AFL), a relative bargain at just eight times earnings and even more affordable than the railroads -- just $21.4 billion. As an added bonus, AFLAC would fit in nicely with Berkshire's GEICO business.

• A deal that just might fly: Similarly, Buffett could find synergies with a purchase of defense contractor General Dynamics (GD). While suffering from a downturn in demand for armored fighting vehicles, America's biggest tank maker has been sold down to bargain-basement levels -- just nine times earnings. Buffett loves a bargain as much as anyone else. Plus, General Dynamics also makes Gulfstream business jets -- the kind that fly so well for Berkshire's "NetJets" airplane-sharing company.

A $30 billion-plus bank account opens many possibilities for Buffett. Will he spend it all in one place -- perhaps even one of these places? Stay tuned.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Johnson & Johnson, General Dynamics, and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of AFLAC, Procter & Gamble, Berkshire Hathaway, and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson.


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29 Comments

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Albert Pike

go ahead and tell 20 million Americans the recession is over, and after we're done laughing at you, we'll slam you upside that bald head with a taco from taco bell and make you pee your depends..

November 27 2012 at 11:24 AM Report abuse rate up rate down Reply
bdyftns

This is pretty funny. He's pulling out of 'consumer' stocks, yet his biggest holding is Coke (KO). Ya, ok Warren.

September 27 2012 at 1:24 AM Report abuse rate up rate down Reply
Don

Does ANYONE in America, besides the likes of a Buffet (Warren, not Jimmy), pay any attention to the still-impending failure of the Euro? Greece is right on the edge of bankruptcy, and Spain and Italy still aren't far behind. When the collapse happens, there's going to be a whole lot less consumer-buying, and in just about everywhere. This IS global. Just because Western reporters have stopped reporting on it means nothing.

August 10 2012 at 5:29 PM Report abuse rate up rate down Reply
flathead1948

Wow, if Time Warner offers me internet for free, maybe I can quit using the Library like I currently have to. Oh ya, but then Warren Buffet will dump his oil stocks since I won't be driving as much !!

August 10 2012 at 4:59 PM Report abuse rate up rate down Reply
flathead1948

I love these stories, a fat cat with more money than we will see in 50 lifetimes and he is dumping consumer stocks? We have no say in anything and now that we aren't buying consumer goods he dumps them. Sounds like Time Warner Corporation that dumped CRN Digital Talk Radio from their line up with no notice. Then when you ask why they say you can get it on the internet. Well excuse me, I don't have internet. Is Time Warner going to offer me internet for free?? Are they going to reduce my cable bill since they are taking off services I pay for. Why did they pull a talk radio service?? Do they have a problem with freedom of speech?? They air the programming they own but dump the small little guy?? Just another example of Corporate America telling the little guy you do as I say !! I'm getting sick of a constant attack on Freedom of the Press and The little Mom and Pop Business !!

August 10 2012 at 4:54 PM Report abuse rate up rate down Reply
Trudy Marie

The average person will NEVER be able to get ahead like these Ka-trillionaires....he can hit the eject button in his Rolls Royce...who cares!!!

August 10 2012 at 4:52 PM Report abuse +1 rate up rate down Reply
Jetncat

Buffett time has come and gone. He made all the money he could in a capitalist society. Now he trying to do the same in a socialist society and he is finding out it won't work.

Sorry Warren you should of thought about this when you supported Obama. Now you are stuck just like the rest of us.

August 10 2012 at 3:19 PM Report abuse +1 rate up rate down Reply
dasunx

Warren Buffett and his Berkshire Hathaway own our power company. They have raised our rates over 70% in the past 8 years and are still unable to provide the infustructure that would deliver reliable power. It has gotten so bad that my city is preparing to seperate from the company and go with a new provider.

August 10 2012 at 12:38 PM Report abuse +1 rate up rate down Reply
mily469

idiots with money and the need to be in the spotlight said the recession was over. come out from behind the limo tinting and see what is really happening. we are getting better, slowly, and may never be back to where we were in my lifetime.

August 10 2012 at 9:02 AM Report abuse +2 rate up rate down Reply
1 reply to mily469's comment
yivvy148

These are not idiots with money but people who prosper in good times and bad. Romney just stated that the rich will do well under any economic circumstances and he is correct. Interestingly when things may not be getting better for the average person the corporate sector has been doing very well and proifts are better then ever. The trickle down economic philosophy of the Republicans will insure the rich do even better as the economic situation gets worse. I know Buffet is supposed to be a Democrat but in truth it is quite meaningless as his economic philosophy is no diiierent then any other rich person, buy low, sell high and take every advantage possible even if it screws the middle class and eliminates jobs in order to enhance profits. The question we should ask is do we want Herbert Hoover (Romney) or FDR (Obama) as President in bad times? Since the Republians took over the House what job plans have they introduced to help the struggling American people? The Ryan plan is go out and find a job and take care of yourself and that is what one should understand when voting.

August 10 2012 at 2:07 PM Report abuse +1 rate up rate down Reply
Jr

This is what America does. Let's look up to crooks and thieves as long as their rich." Obama's creating class warfare", how could that be? One must first have some "CLASS" for that right. Warren buffet ownes the airfield that the pilots came from that flew into the World Trade Center. Check it for yourself.He helped orgastrate the WHOLE DAMN thing! While ignorant people listen to the media tell you that 9/11 was a "terrorist" act LOL! Sorry for those who lost loved ones in the mess, but the TRUTH is, they were expendable people to them. Nothing can get in the way of "The New Worl Order". you are living it Right NOW!

August 10 2012 at 9:02 AM Report abuse -2 rate up rate down Reply
1 reply to Jr's comment
dasunx

This is our third summer of failed recovery.......... Are you enjoying it....?

August 10 2012 at 12:40 PM Report abuse +3 rate up rate down Reply
1 reply to dasunx's comment
bdyftns

And the Dones Jones is over 13,000. Yup, my stocks are enjoying it thanks.

September 27 2012 at 1:28 AM Report abuse rate up rate down