Has Warren Buffett lost his magic touch?
Buffett’s Berkshire Hathaway (BRKB) has lagged the broader market this year. The stock is up just 6.6% in 2019, compared to a nearly 18% gain for the S&P 500.
Several of Buffett’s favorite stocks — most notably Wells Fargo (WFC) and Coca-Cola (KO) — have underperformed. Another top pick, Kraft Heinz (KHC), has been an outright disaster, plunging more than 20% this year.
Buffett and Berkshire vice chair Charlie Munger will probably face questions from investors about those struggling stocks, possible Berkshire acquisitions and succession plans at the Berkshire Hathaway annual shareholder meeting in Omaha this weekend.
Here are some of the top questions that should be on the minds of the Berkshire Hathaway faithful.
1. Who will be the next Buffett? The Oracle of Omaha will turn 89 in August. Munger celebrated his 95th birthday on New Year’s Day, so he is not going to take over for Buffett.
Buffett has been coy about a succession plan. He wrote in 2015 that “we now have the right person to succeed me as CEO — a successor ready to assume the job the day after I die or step down.” But he didn’t elaborate.
Presumably, one of two top Berkshire executives will take over the day-to-day operations: Greg Abel, CEO of Berkshire Hathaway Energy Company, or Ajit Jain, Berkshire Hathaway’s insurance guru.
Buffett and Munger have repeatedly praised Abel and Jain, and the two were both named to Berkshire’s board last year.
But don’t forget about Berkshire Hathaway’s top investment managers, Ted Weschler and Todd Combs. They will probably keep managing the company’s massive portfolio after Munger and Buffett are gone.
2. How do you spend all that cash? Buffett revealed in this year’s annual shareholder letter that the company has about $112 billion in cash. That’s a lot of money to play around with, and Buffett has said that he wants to make another major acquisition.
There has been some speculation that Buffett could buy a major airline, since Berkshire already owns stakes in the four major US carriers: Southwest (LUV), American (AAL), Delta (DAL) and United (UAL).
The problem is that the market rally has made any potential targets much more expensive, and Buffett has said he doesn’t want to overspend on deals.
Instead, Berkshire Hathaway could buy back more of its own stock, which would reward shareholders by increasing the company’s earnings per share. The company relaxed rules it had on share repurchases last year and has since been an aggressive buyer of Berkshire stock.
Some investors may also ask whether Buffett would now consider paying a dividend as well, which Buffett has said in the past he would not do.
But Buffett may also use some cash to act more like a banker. Berkshire Hathaway said this week it plans to invest $10 billion in oil company Occidental Petroleum (OXY) to help Occidental fight Chevron (CVX) in a bidding war to purchase rival Anadarko Petroleum (APC).
Even so, investors probably want to see Buffett do more with his cash. The Occidental deal “falls short of an outright acquisition … something the market is craving,” wrote CFRA Research analyst Cathy Seifert in a recent report.
3. What’s next for the weaker links? Berkshire Hathaway has its fair share of market winners this year, including Apple (AAPL), Bank of America (BAC) and American Express (AXP).
But investors may have more questions about the stocks that have not done as well, particularly Kraft Heinz.
Kraft Heinz is a bit of an unusual holding for Berkshire, since the food company’s other big investor is the private equity firm 3G. Berkshire Hathaway is the ultimate buy-and-hold investor and doesn’t make rash moves. Berkshire also usually makes passive investments instead of actively shaking things up.
But Kraft Heinz — under pressure from 3G — slashed costs after Kraft and Heinz merged four years ago, and it has failed to invest enough in new products that younger consumers want.
That led to a massive writedown of Kraft Heinz’s assets earlier this year and questions about whether the company can turn things around.
It will be interesting to hear if Buffett still has faith that 3G and new Kraft Heinz CEO Miguel Patricio — a long-time Anheuser-Busch InBev (BUD) executive — can right the ship. If not, Kraft Heinz might wind up like IBM (IBM), a once-beloved Buffett holding that he dumped over the past couple of years.
Things aren’t as bleak at Buffett’s beloved Coca-Cola. But that company still has to diversify beyond its soda lineup and stress healthier products like milk, water, tea and flavored seltzer in order to keep up with evolving tastes.
Buffett may need to defend why he still thinks a company best known for its sugary sodas is a core holding, especially at a time when he’s also looking to shake up the health care industry. Berkshire is working on a joint venture called Haven with Amazon (AMZN) and JPMorgan Chase (JPM).
Shareholders may also press Buffett on who he thinks should clean up scandal-ridden Wells Fargo. CEO Tim Sloan recently stepped down, and the bank continues to lag larger rivals.
Buffett told the Financial Times in April that he thinks Wells Fargo should look for a seasoned regional bank executive to take over for Sloan instead of someone from a bank with big Wall Street ties like Goldman Sachs (GS) or JPMorgan Chase.
It would be fun if someone at the shareholder meeting asked Buffett directly who he’d hire to lead Wells Fargo. Should it be a woman, given their absence among banking leadership?
4. Who does Buffett like for 2020? Buffett hasn’t been shy about politics. He publicly backed Hillary Clinton in 2016 and has been critical of some of President Donald Trump’s tax cuts even though Berkshire Hathaway has benefited from them.
Buffett told CNBC in February that he’d back fellow billionaire Michael Bloomberg if he ran for president. Buffett also said he thought it would be a bad idea for former Starbucks CEO Howard Schultz to run as a third-party candidate. Bloomberg said in March that he has ruled out a run. Schultz has said he is “seriously thinking” about it.
So would Buffett want to throw his support — and some of his nearly $90 billion in net worth — behind another candidate? What about former vice president and Democratic front runner Joe Biden? Or another of the legion of candidates running for the Democratic nomination?
It’s not too soon to ask. But don’t be surprised if Buffett doesn’t want to tip his hand just yet.
