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Warren Buffett’s stock picks are impossible to ignore. A $10,000 stake in the US S&P 500 in 1965 it would be worth about $3 million in 2023. But put it in Buffett’s company Berkshire Hathaway instead, that money would now be worth a barely incredible $271 million.
Best of all, his simple ‘value investing’ style is great for everyday investors like me who don’t have a mainframe at my side to run complex algorithms.
Buy good companies for the long term, that’s your rule of thumb. And of all the companies he owns, only one is UK-based and listed on the FTSE 100.
840% returns
Berkshire Hathaway’s latest 13F filing shows the company has a $42 million stake in Diageo (LSE: DGE), the spirits giant.
Buffett initially bought the company in 1991 and Diageo shares have risen 840% in the 32 years since. For comparison, the S&P 500 is up 1,000% in the same period. There are also dividends to consider, but I think it’s fair to say that it wasn’t a big winner.
The crucial detail, however, is that he still has a stake in it. So what do you like the look of?
Reasons to buy
Diageo’s strength lies in its brands. The company has a range of products such as Guinness, Smirnoff, Johnnie Walker and Captain Morgan they are household names around the world. It is thanks to this brand strength that it earns revenue from more than 180 countries.
The income itself looks good. It has risen in each of the past six years, except for 2020 when the pandemic hurt alcohol sales. And the latest business update showed revenue up 21.4% and operating profit up 26.3% for 2022 as well.
But what if a recession looms? Alcohol stocks are generally considered ‘defensive’, meaning the bottom line is not affected when times are tough.
There are plenty 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, while by 2021 that number had dropped to around 13%.
Over the years, people have become more aware of the health drawbacks of smoking. And if the same thing happens with alcohol? Companies like Diageo can be a bad investment in the long run.
Diageo is aware of this, of course, and wants to shift its focus to premium alcohol products. Even his catchphrase “drink better, not more” shows that the company wants to position itself away from binge drinking. This might pay off, but I’m still not sure.
I’m not buying
Although Berkshire Hathaway owns a stake in Diageo, it is one of its smallest holdings, representing just 0.014% of its $300 billion portfolio. That suggests to me that Buffett is not overly optimistic about this action. And I’m inclined to agree that there are better stocks right now.
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