Berkshire Hathaway (BRK.A 0.35%) (BRK.B -0.16%) CEO Warren Buffett has a way of captivating the attention of new and tenured investors. It’s the result of overseeing a greater than 4,200,000% gain in Berkshire’s Class A (BRK.A) shares since becoming CEO in the mid-1960s.
Mirroring the Oracle of Omaha’s trades has been a moneymaking strategy that’s delivered for decades. However, it’s important to recognize that even the great Warren Buffett isn’t infallible.
Based on the estimated cost bases of Berkshire Hathaway’s roughly four dozen holdings, according to data from Form 13F aggregation website WhaleWisdom.com, Buffett and his team have unrealized losses on a handful of their positions. In particular, Warren Buffett is currently losing close to $15.8 billion, on a combined basis, from four brand-name holdings, not including dividends received.
Kraft Heinz: $12.91 billion in estimated unrealized losses
The holding that’s absolutely clobbering the Oracle of Omaha from an unrealized loss standpoint is consumer-packaged goods giant Kraft Heinz (KHC -0.56%). WhaleWisdom estimates a cost basis of $75.49 on Berkshire Hathaway’s 325,634,818-share position. With a closing price of $35.85 on July 5, Buffett and his team are down by an estimated $12.91 billion on this position.
Although Kraft Heinz benefited from consumers eating at home more often during the pandemic, and its well-known brands have helped it pass along higher prices to its consumers as inflation spiked to four-decade highs, there are very clear red flags with the company.
To begin with, there’s clear evidence consumers are growing exhausted with price hikes. Despite a 14.7% year-over-year price increase during the fiscal first quarter, ended April 1, 2023, Kraft Heinz only reported a 9.4% global growth rate. This means the company’s volume/mix fell 5.3%, which may signal that consumers are trading down to cheaper store brands.
This bigger issue is Kraft Heinz’s suspect balance sheet. Even after taking a $15.4 billion goodwill writedown in February 2019, the company began April 2023 with nearly $30.9 billion in goodwill and roughly $20 billion in long-term debt. Comparatively, it was sitting on just $826 million in cash and cash equivalents. Although it’s a profitable business, Kraft Heinz doesn’t have the capital needed to reignite sustained consumer interest in its brands. Worse yet, attempts to sell some of its brands in recent years to lower its outstanding debt have fallen flat.
Despite Kraft Heinz generating a hearty $521 million in annual dividend income for Berkshire Hathaway, this is, unquestionably, Warren Buffett’s worst investment in recent memory.
Paramount Global: $1.43 billion in estimated unrealized losses
The only other Warren Buffett stock that’s currently costing Berkshire Hathaway in excess of $1 billion in unrealized losses at the moment is media company Paramount Global (PARA -1.09%). WhaleWisdom estimates Berkshire’s cost basis in Paramount as $31.44, which is well above its July 5 closing price of $16.15. Based on the 93,730,975 shares of Paramount held by Berkshire Hathaway, this equates to an estimated unrealized loss of $1.43 billion.
Paramount is facing two sizable headwinds that have weighed on its stock. First, it’s legacy media operations are still fairly reliant on advertising. Due to heightened recessionary fears, most advertisers have pared back their spending.
The other issue for Paramount is the operating losses from its streaming services. Even though it’s gaining direct-to-consumer (DTC) subscribers, adjusted operating income before depreciation and amortization (OIBDA) for its DTC segment worsened to a loss of $511 million in the March-ended quarter — 12% worse than the year-ago period. This combination of a tougher ad environment and larger DTC losses coerced the company to slash its quarterly dividend from $0.24 to $0.05.
However — and this is a big “however” — Paramount Global is also the company behind Pluto TV, the nation’s No. 1 free, ad-supported platform. With 80 million monthly active users, Pluto TV is uniquely positioned to thrive if the U.S. economy does dip into a recession.
Citigroup: $814.3 million in estimated unrealized losses
The third Warren Buffett stock that’s costing Berkshire Hathaway nearly $16 billion on a combined basis is banking behemoth Citigroup (C 0.79%). WhaleWisdom estimates Berkshire’s cost basis in Citigroup is $61.54, which is well below the $46.80 shares ended at on July 5. With 55,244,797 shares held, Buffett’s company is losing more than $814 million on an unrealized basis.
One clear concern with bank stocks is their financial stability given what we witnessed with a few regional bank stocks in March and April. Although deposit outflows from regional banks have tapered, and all 23 banks (including Citi) that were administered the Fed’s latest stress test passed, Wall Street and investors still appear somewhat apprehensive to give bank stocks the all-clear.
To add, Citigroup’s international operations have often failed to live up to expectations. In addition to dealing with weaker growth prospects throughout much of Europe, the company found no buyers for Citibanamex, the consumer and small business banking subsidiary of its Mexican subsidiary.
The one factor working in Citi’s favor is that it trades well below its tangible book value. This makes it a logical target for value investors. However, with little in the way of growth momentum overseas and investors still seemingly suffering from a crisis of confidence overhang with U.S. banks, it’s tough to envision much in the way of upside for Citigroup.
HP: $616.9 million in estimated unrealized losses
The fourth stock that’s collectively costing Warren Buffett in the neighborhood of $16 billion on a combined basis is personal-computing (PC) and printing-services provider HP (HPQ 0.74%). WhaleWisdom estimates Berkshire’s cost basis in HP to be $35.78, and shares of the company closed out July 5 at $30.68. With 120,952,818 shares held, we’re talking about an unrealized loss of almost $617 million, not including dividends.
Perhaps the biggest cardinal sin for HP is that it’s a tech stock no longer delivering much in the way of growth. Even though large-cap tech stocks are leading Wall Street higher, HP’s growth heyday occurred roughly two decades ago. Most investors buying into HP these days are doing so purely on the basis of its microscopic valuation — a multiple 8 times Wall Street’s consensus forward-year earnings.
Another problem for HP is that PC demand has been whipsawed by the COVID-19 pandemic. During the initial stages of the pandemic, PCs were flying off the proverbial shelves. Work-from-home demand fueled growth that hadn’t been seen in a long time. However, with life now returning to some semblance of normal, HP is facing some brutal year-over-year comparisons as PC sales slow.
The saving grace for HP, at least in the eyes of Warren Buffett, may be its capital-return program. Mature businesses are known for returning capital to patient long-term shareholders. HP’s 3.4% dividend is more than double the yield of the S&P 500, and the company has repurchased approximately $13 billion of its common stock over the trailing three years.