When Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) CEO Warren Buffett makes a move, Wall Street and retail investors pay close attention. That’s the sort of respect Buffett has earned after transforming $10,000 in seed capital in the mid-1950s into a net worth of more than $89 billion today.
Buffett has built up his own net worth, as well as created more than $400 billion in value for Berkshire Hathaway’s shareholders, two ways. First, his company has acquired more than five dozen businesses in a variety of sectors and industries, all of which contribute to Berkshire’s top and bottom lines. Secondly, the Oracle of Omaha, as Buffett has come to be known, and a small number of his team are responsible for investing Berkshire Hathaway’s money into a portfolio of stocks. Right now Berkshire Hathaway holds 48 securities with an aggregate market value of $249 billion.
Although Buffett is best known for his buy-and-hold ethos, it’s not uncommon for new companies to be added, or existing positions to be pared or completely sold out of. While it’s always a mystery as to what Buffett and his team will sell next, the following four stocks appear the likeliest to get the heave-ho at some point in 2020.
Berkshire Hathaway CEO Warren Buffett at his company’s annual shareholder meeting. Image source: The Motley Fool.
If my arm were twisted, I’d choose integrated oil and gas giant Phillips 66 (NYSE: PSX) as the stock that’s the most likely to be completely sold out of in 2020. For what it’s worth, Berkshire Hathaway already sold more than 6.7 million shares of its stake in Phillips 66 in 2019, representing a reduction of 56% from where it began the year. This clearly suggests that Buffett would have little issue in parting with the remaining 5.18 million shares Berkshire owns.
There are two reasons selling Phillips 66 here makes sense. First — and by far the more important reason — is that Buffett committed $10 billion to Occidental Petroleum in April 2019 to aid in its acquisition of Anadarko. While this is ultimately a bet on higher oil prices, which is something Buffett could benefit from by holding both integrated oil giants, the magnitude of Buffett’s commitment implies that he believes Occidental offers a greater potential return on investment than Phillips 66.
Secondly, Phillips 66 has more than tripled in value since Buffett took his initial stake in 2012, so profit-taking could be in order. Energy has never represented a large percentage of Berkshire’s holdings, so freeing up additional cash by selling Phillips 66 seems like a logical move.
Image source: Getty Images.
Johnson & Johnson
Another likely candidate to get the boot is healthcare conglomerate Johnson & Johnson (NYSE: JNJ). Berkshire currently owns 321,000 shares, worth $47 million, making J&J one of Berkshire’s smallest positions by value.
Once upon a time, just prior to the Great Recession, Buffett was Johnson & Johnson’s fourth-largest shareholder. But the Oracle of Omaha wound up selling practically all of his company’s position in the early part of the previous decade. In 2011, The Wall Street Journal noted that Buffett wasn’t particularly happy with the way J&J structured its acquisition of medical-device maker Synthes. The $19.7 billion deal was paid for with cash and stock — and Buffett loathes the idea of using common stock as capital when cash is available. Not long after this deal, the paring down of J&J began.
Selling Berkshire’s remaining stake in J&J would also make sense given that Johnson & Johnson’s reliance on pharmaceutical sales as a percentage of total revenue has increased over the past decade. Buffett isn’t a fan of having to keep up on clinical trial data, which is why healthcare represents such a small percentage of his company’s investment holdings. I expect J&J to be removed sooner rather than later.
Image source: Getty Images.
Cable services provider Charter Communications (NASDAQ: CHTR) is another candidate that could get the ax from Berkshire Hathaway’s portfolio. The more than 5.4 million shares of Charter that Buffett’s company owns are worth $2.7 billion, making it Berkshire’s 15th-largest holding.
As with Phillips 66, Buffett has been paring down his stake in Charter for some time. Last year, for instance, over 1.6 million shares of the company were sold. One reason this paring down could continue is that Berkshire Hathaway is up big on its initial stake, opened in 2014. The position having essentially tripled in value, it wouldn’t be surprising to see the Oracle of Omaha ring the register and put this capital to work elsewhere.
Though Buffett intends to hold onto his investments for long periods of time and doesn’t just sell in order to lock in gains, the other reason selling could be prudent is Charter’s valuation. With top-line sales growth estimated at only 4% to 5% but a forward P/E ratio of 38, Charter isn’t cheap. Buffett likes to own good companies at fair prices — and this is anything but a “fair” price.
Image source: American Airlines.
American Airlines Group
Lastly, I believe American Airlines Group (NASDAQ: AAL) could be shown the door in 2020. Berkshire Hathaway currently owns a 10% stake in the major airline.
Warren Buffett first began diving into airline stocks during the second half of 2016, after West Texas Intermediate oil dipped to as low as $26 a barrel in the first quarter of that year. With crude prices sinking, it gave major airlines the pricing power to compete with regional airlines, as well as fattened up their operating margins.
The thing is, we’re almost certainly in the latter innings of the current economic expansion, and airlines have an abysmal operating track record during economic contractions and recessions. American Airlines is particularly worrisome given that it has more than $29 billion in net debt. Though management has pushed to modernize the company’s fleet, and interest rates do remain at attractive levels for borrowing purposes, American Airlines’ debt situation is a serious concern. I suspect it may be enough of a worry to get Buffett to “deplane” from the stock completely in 2020.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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