Did Warren Buffett Go Wrong With Walmart and American Express?
With two of Warren Buffett's top five holdings greatly underperforming, investors could well be asking whether Buffett's Berkshire Hathaway (BRK.A) - Get Report made a rare error in judgment. Both Walmart (WMT) - Get Report and American Express (AXP) - Get Report sank to 52-week lows in recent sessions, at a time when the overall market has recovered quite nicely from its sharp selloffs of August and September.
Should Buffett remain wedded to these stocks? What lies ahead for Walmart and American Express? We investigate their respective slumps and reveal whether these two stocks are smart bargains now or dangerous value traps to be avoided.
1. Walmart
On Oct. 14, shares of Walmart plummeted 10%, their biggest single-day drop in 25 years. The huge selloff was triggered by the company's announcement that higher wages, spending on e-commerce and lower prices would crimp earnings per share in the next fiscal year.
Walmart is facing tough competition, and low prices are no longer its preserve, because of the emergence of low cost retailers such as Aldi, WinCo and Family Dollar Stores.
Buffett had acquired a meager 0.5% stake in Walmart at roughly $47 per share way back in 2005. By 2009, his holdings had doubled to nearly 39 million shares and by 2014, his 2.1% stake in the company was worth more than $5 billion. In 2015, he added another $800 million to his portfolio at $75 per share.
Walmart's shares were trading Thursday morning at $57.31, not far above their 52-week low of $56.77. They have declined 33% year to date and are roughly at 7% less than Buffett's average purchase price of $69.66 per share.
As the 2008 credit crisis surfaced, Walmart reinvested less and less of its operating cash flows, with the rest being accounted for by dividends and share repurchases. In 2011, the payout ratio increased to 80%, as the company returned $19 billion to its shareholders. This lack of investment could now be haunting the company.
2. American Express
American Express' shares traded Thursday morning at $72.36. Their 52-week low is $71.39. Year to date, the stock's price has declined by 22%.
Buffett holds 151.6 million shares of American Express, or 15.4% of the company, making it his fourth largest holding. The investment is one of Buffett's most profitable and among his oldest holdings. Berkshire Hathaway's stake in American Express was valued at $11 billion in May 2015 and was acquired at a cost of about $1.3 billion.
American Express is facing new challenges on the payments front from tech start-ups and big technology companies such as Apple. The future of payments is innovation, simplicity and mobile payment solutions that heighten customer experiences, as epitomized by ApplePay. American Express has not sufficiently adapted to these trends. Indeed, the storied credit card company joins a growing list of vulnerable companies that are finding it hard to adapt to change.
The company's biggest effort at technological innovation so far is its Big Data blueprint. By analyzing customers' behavior, American Express will strive to understand and anticipate their preferences and personalize its offerings to meet their specific needs.
In coming quarters, Walmart and American Express will be stretched to their limits by competition from nimble rivals. However, it would be premature to label them as doomed, because each possesses inherent strengths and a valuable brand name. It's too soon to say Buffett has made a mistake, but prudent investors should hold off in buying either stock for now.
That said, we've found a list of weak stocks that are are indeed doomed and poised to collapse. For a full list of dangerous stocks that could wreck your portfolio, click here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.