Warren Buffett’s stock picks are impossible to ignore. A $10,000 stake in the US S&P 500 in 1965 would be worth around $3m in 2023. But put it in Buffett’s company Berkshire Hathaway instead and it that money would now be worth a scarcely believable $271m.
The best thing is that his simple ‘value investing’ style is great for everyday investors like me who don’t have a mainframe computer by my side to run complex algorithms.
Buy good companies for the long term, that’s his golden rule. And of all the companies he holds, only one is UK-based and listed on the FTSE 100.
840% returns
Berkshire Hathaway’s latest 13F filing shows the company holds a $42m stake in Diageo (LSE: DGE), the alcoholic drinks behemoth.
Buffett initially bought into the company in 1991 and Diageo stock is up about 840% in the 32 years since. For comparison, the S&P 500 is up about 1,000% in the same time period. There are dividends to consider too, but I think it’s fair to say this wasn’t a huge winner.
The crucial detail however is that he still holds a stake in it. So what is it he likes the look of?
Reasons to buy
Diageo’s strength lies in its brands. The company has a range of products like Guinness, Smirnoff, Johnnie Walker and Captain Morgan that are household names around the world. It’s thanks to this brand strength that it draws revenue from over 180 countries.
The revenue itself looks good. It’s increased each of the last six years, except in 2020 when the pandemic hurt alcohol sales. And the latest trading update showed revenue up 21.4% and operating profit up 26.3% for 2022 as well.
But what if a recession is on the way? Alcohol stocks in general are considered ‘defensive’, which means the bottom line doesn’t get hit when times are tough.
There are lots of reasons to be bullish on Diageo, so why am I not buying? Well, one thing stands out to me as a reason to stay away.
The big problem
Diageo is a ‘sin stock’, which means it sells products or services that some may consider ethically dubious. Examples include gambling, tobacco, weapons or, in this case, alcohol. The problem with such stocks is that the long term is unpredictable.
Take cigarettes. In 1974, around 46% of adults in the UK smoked whereas in 2021, that figure had dropped to around 13%.
Over the years, people got wiser to the health drawbacks of smoking. What if the same happens with alcohol? Companies like Diageo might be a poor long-term investment.
Diageo is aware of this, of course, and wants to shift its focus to premium alcohol products. Even its catchphrase of “drink better, not more” shows the company wants to position itself away from binge drinking. This could pay off, but I remain uncertain.
I’m not buying
Even though Berkshire Hathaway owns a stake in Diageo, it’s one of its smallest holdings, making up only 0.014% of its $300bn portfolio. That suggests to me that Buffett isn’t overly optimistic on this stock. And I’m inclined to agree that there are better stocks out there at the moment.
