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Published: May 22, 2020 at 10:36 a.m. ET, By Howard Gold<\/p>\n
Last week I wrote that this was the end of the Warren Buffett era as Berkshire BRK.A and BRK.B underperformed the S&P 500 SPX over the entire 2009-2020 bear market. Even Buffett himself recommends investors buy the S&P.<\/p>\n
Many Buffett fans responded by saying don\u2019t count Buffett out yet because when (not if) the market tanks again, he\u2019ll have more than $130 billion in cash to scoop up bargains. My MarketWatch colleague Mark Hulbert noted that top advisers often come back<\/a> from losing streaks to post big gains.<\/p>\n So, what have the nearly 90-year-old Buffett and his 96-year-old business partner Charlie Munger done for us lately? Based on Berkshire\u2019s SEC filings, three of Buffett\u2019s biggest recent investments\u2014Kraft Heinz KHC, Occidental Petroleum OXY, and airline stocks\u2014have lost at least $7 billion altogether out of an investment of roughly $10 billion in each.<\/p>\n To my knowledge, this is the first time anyone has reported that figure. (Berkshire did not respond to my emailed questions by deadline.)<\/p>\n Heinz debacle<\/strong><\/p>\n In 2013 Berkshire and private equity firm 3G Capital paid $23.2 billion to buy H.J. Heinz Co.<\/a>, and two years later Heinz bought Kraft Foods Group for $54 billion. Kraft Heinz Co. stock moved closely with the S&P for a couple of years. Then, after hitting an all-time closing high above $93 in February 2017, it began a long decline.<\/p>\n Last year Berkshire wrote down its investment by $3 billion, while Kraft Heinz took a $15 billion write-off<\/a> on its Kraft and Oscar Mayer brands. In February, even before the market selloff began, Fitch Ratings and S&P Global Ratings downgraded Kraft Heinz to junk status<\/a>. Meanwhile, in 2018 and 2019, 3G sold millions of shares (it still has a big stake) as Berkshire held firm. As of March 31, Berkshire\u2019s Kraft Heinz shares were worth about $8 billion, around $2 billion less than what it paid for them.<\/p>\n When the deal was struck, The New York Times called it \u201ca big bet on conventional staples<\/a> of the American cupboard, even as consumers are shifting away from processed foods.\u201d<\/p>\n Millennials just aren\u2019t in to the iconic brands Buffett enjoyed as a boy.<\/p>\n \u201cI made a mistake<\/a> in the Kraft purchase in terms of paying too much,\u201d Buffett told CNBC last June. No kidding.<\/p>\n Occidental Petroleum<\/strong><\/p>\n Just two months later, in August, Berkshire completed a $10 billion investment in Occidental Petroleum, which helped Oxy win a bidding war against oil giant Chevron CHV to buy Anadarko Petroleum for $38 billion. The deal made Occidental the biggest player in the U.S.\u2019s Permian Basin, the world\u2019s highest producing oilfield<\/a>.<\/p>\n Berkshire got 100,000 preferred shares, which gave it first dibs on dividend payments if things went south. That\u2019s exactly what happened less than six months later. After the recent collapse in crude, Occidental cut dividends on its common stock by 86%. But it still owes Berkshire a hefty 8% annual dividend on the preferred shares, which Occidental has paid out in depreciated common stock rather than cash.<\/p>\n On Wednesday, Occidental common shares changed hands below $15, about one third the $44 a share at which it traded when the deal closed. As of March 31, Berkshire had lost about $500 million on the common stock it owned, but the April dividend payment doubled Berkshire\u2019s common share holdings, cutting its paper loss in half.<\/p>\n We couldn\u2019t determine a current price for the preferred shares of Occidental, which don\u2019t trade regularly. The accumulation of those preferred dividends over time, whether in cash or common stock, could soften the blow of an investment that at best looks like a masterpiece of bad timing.<\/p>\n Not one, not two, not three, but four<\/strong><\/p>\n And then there were the airlines. From mid-2016 through early 2017, Berkshire bought tens of millions of shares in the four largest U.S.-based carriers\u2014American Airlines Group AAL, Delta Air Lines DAL, Southwest Airlines LUV, and United Airlines UAL.<\/p>\n The price tag was north of $9.3 billion, by my calculations.<\/p>\n But when coronavirus hit, airline stocks plummeted, and by the time Berkshire dumped them all in April, they were worth about $4.3 billion, assuming all shares were sold on the SEC filing dates. That amounts to a stratospheric loss of $5 billion. Add all these losses together and you have at least a $7 billion hit to Berkshire, not including any decline in value on the Oxy preferred shares it owns.<\/p>\n Buffett has had some bad luck. Who could have foreseen COVID-19? But the problems with Occidental happened soon after the deal closed and there have been big clouds hanging over energy stocks<\/a> for years. Buffett also waited until April to dump airline stocks, near the bottom.<\/p>\n Even more troubling, after he bought a stake in USAir in 1989, he complained the investment had \u201csoured before the ink dried on the check.\u201d<\/p>\n \u201cInvestors have regularly poured money into the domestic airline business to finance profitless (or worse) growth,\u201d he wrote to shareholders in 1992.<\/p>\n As recently as 2007, he noted that \u201ca durable competitive advantage [in the airline industry] has proven elusive ever since the days of the Wright brothers.\u201d Even in 2013, he called airlines \u201ca death trap for investors.\u201d<\/p>\n So, he didn\u2019t heed his own warnings, then went out and bought not one airline, but four? After all these mishaps and losses, who would want to bet a single share of Berkshire Hathaway stock that Warren Buffett is going to return to his former glory?<\/p>\n