The performance of Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) equity portfolio this year has been a mixed bag.
On one hand, Warren Buffett (Trades, Portfolio)'s favorite investment, Apple Inc. (AAPL, Financial), which made up just under 40% of Berkshire's equity portfolio at the end of the second quarter, has returned 35% so far this year. The stock has substantially outperformed the S&P 500, which has returned 18.7% year to date at the time of writing.
On the other hand, a handful of stocks have underperformed the market, costing the "Oracle of Omaha" several billion dollars so far this year. While it is unlikely the billionaire investor is concerned about this performance, it is still interesting to look at these stocks and understand why they have underperformed. When Buffett makes an investment, he always does so with the intention of holding the stock for many years, if not decades. A decline could present an attractive entry point for us regular investors to buy a high-quality business at a discount price.
The first company is Kraft Heinz Co. (KHC, Financial). This investment has been an unmitigated disaster for shareholders of Berkshire, which owns 26.7% of the business. The stock is down 41% in 2019 alone thanks to a perfect storm of events.
Many analysts believe the company has been underinvesting in its brands, preferring instead to slash costs and return extra capital to shareholders rather than invest for the future.
As a result, sales have been falling and the company took a $15.4 billion writedown on a number of its popular brands earlier this year. On top of this, Kraft has had to delay the publication of its results several times. This suggests the business has poor financial controls as well as a lack of understanding about its own operations -- something the Securities and Exchange Commission is currently looking into.
It is difficult to tell exactly how much money Buffett has lost with his Kraft investment. Figures suggest that on Aug. 8, when the company plunged 27% following the publication of its first-half results, Berkshire suffered a $4.3 billion loss in a single day of trading.
At the end of the first quarter of 2017, when shares of Kraft Heinz peaked at more than $90, the position in Berkshire's portfolio was worth a shade under $30 billion. The holding was worth around $10 billion at the end of second-quarter 2019, which is a loss, excluding dividends, of approximately $20 billion.
Underperforming
Another big loser this year is The Bank of New York Mellon Corp. (BK, Financial). This is a relatively small position for Berkshire. At the end of the second quarter, the conglomerate owned 81 million shares for a portfolio weight of 1.7% and a total market value of $3.6 billion.
So far this year, shares of the bank are down around 9% excluding dividends, underperforming the S&P 500 by around 26%.
Buffett has been taking advantage of the stock's recent weakness. He increased his position by 20% in the third quarter of 2018 and a further 4% in the fourth quarter. Current figures suggest the decline in the value of the company so far this year has cost Berkshire's investors around $400 million.
Teva Pharmaceutical Industries Ltd. (TEVA, Financial) has continued to be a terrible investment. With less than $1 billion of Berkshire's capital invested in this pharmaceutical business, it is unlikely Buffett made this call himself. Nonetheless, it is still one of the worst-performing stocks in the portfolio.
It is difficult to tell the exact purchase price, but 13F filings show Berkshire was buying the shares between $18.95 and $24.32.
At $24.31, the 43.2 million-share stake was worth just over $1 billion. At the current price of $6.89, it is worth just under $300 million, a loss of $700 million. So far this year, shares of the company have lost 55% of their value, underperforming the S&P 500 by 72%.
Disclosure: The author owns shares of Berkshire Hathaway.
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