After a promising start to 2018, major stock indexes forfeited their yearly gains over the past few weeks amid heightened concerns about a looming trade war between the U.S. and China. Now, as investors look to rebound from what has been a tough stretch for many, it could prove prudent to dig deep into the tried-and-true strategies of Wall Street’s top figures.
One of those top performers is, of course, the legendary Warren Buffett. Dubbed the “Oracle of Omaha” for his decades of success, Buffett has amassed billions of dollars through a meticulous brand of value investing that touts patience and confidence. Simply put, Buffett and his Berkshire Hathaway (BRK.B - Free Report) firm are icons of the investing world.
Berkshire Hathaway’s U.S. long stock portfolio holds positions in 45 individual stocks, with the five-largest of those positions accounting for roughly 62% of its total value. This portfolio is tracked by a large swath of investors looking to mimic the success of Berkshire’s legendary CEO.
But not even Berkshire Hathaway has made it through 2018’s early volatility unscathed, and with most of the public lacking the patience of Buffett, some followers of the portfolio might consider ditching some of its worst-performing stocks. Let’s take a closer look.
Wells Fargo & Company (WFC - Free Report)
Commercial banking giant Wells Fargo has been marred by a fraudulent account scandal that tracked back to upper management, calling the company’s business practices into question and damaging its public reputation. More recently, interest rate uncertainty has caused headwinds for the finance sector. Shares of WFC have slipped more than 13% so this year, lagging the S&P 500’s nearly 2% drop.
Buffett has been forced to publicly defend Wells Fargo at times, with the bank remaining one of Berkshire’s largest holdings. On top of that, Wells Fargo has underperformed from an earnings standpoint, missing consensus EPS estimates in the previous quarter and inspiring a significant selloff.
The company has an opportunity to turn things around with its new report on Friday. Our latest Zacks Consensus Estimates are projecting that Wells Fargo will post earnings growth of 7%, but revenue is expected to be down year over year and could add more pressure to the situation.
Still, earnings estimates have trended slightly higher throughout the quarter, indicating that the company’s fortunes could be improving. WFC is holding a Zacks Rank #3 (Hold) heading into its report date. Meanwhile, shares are trading at just 10.9x forward 12-month earnings, which is a discount to the stock’s median Forward P/E of 12.5 displayed over the past year.
The Kraft Heinz Company (KHC - Free Report)
Kraft Heinz remains one of Berkshire’s largest holdings, but the stock has underperformed amid a continued shift in consumer preferences toward natural and organic ingredients over packaged and processed food. The stock has tumbled more than 21% so far this year, and shares are hovering just above their 52-week low.
These headwinds are putting pressure on Kraft’s earnings outlook. Within the past 60 days, the company has witnessed seven revisions to its full-year EPS estimates, with 100% agreement to the downside. Analysts now expect the company to post earnings growth of 8% on net sales growth of 1%.
This negative estimate revision activity has earned KHC a Zacks Rank #4 (Sell). Still, the Zacks Rank is only designed to be a one- to three-month indicator, and Kraft’s dividend yield of 4.1% is likely to keep buy-and-hold investors on board.
Southwest Airlines Co. (LUV - Free Report)
Southwest was one of Berkshire’s 10-largest holdings at the end of 2017, followed shortly by fellow airline company Delta Air Lines (DAL - Free Report) . Unfortunately, industry-wide headwinds—including lower-than-expected demand for spring travel—have punished these stocks. Heading into the day, LUV was down more than 17% on a year-to-date basis.
Management has a bearish view on unit revenues for the first quarter of 2018. The carrier now expects revenue per available seat mile to be flat, down from the previous forecast of growth between 1% and 2% from the prior-year quarter.
This negative outlook has put a damper on analyst sentiment for Southwest. Over the past two months, LUV has witnessed six negative revisions to its full-year earnings estimates, with 100% agreement among revising analysts. This negative revision activity has given the stock a Zacks Rank #4 (Sell).
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