With Berkshire Hathaway (NYSE:BRK.A) boasting cash reserves amounting to nearly $130 billion, there has been heavy speculation on the investment prospects Warren Buffett could spend this money on.
The Berkshire Hathaway CEO has not helped matters as less than a year ago he promised to make an “elephant-sized” acquisition. The likely candidates that have been speculated upon have been wide and varied. This has included adding to his transportation-heavy portfolio by piling into logistics firm FedeEx (NYSE:FDX).
Another stock thought to be on Buffett’s radar is Boeing (NYSE:BA). Among those betting on this is Meyer Shields, an analyst at Wall Street firm Keefe, Bruyette & Woods.
Buying Boeing, it has been argued, would align with Buffett’s penchant for buying undervalued and unloved firms. While that could be true, not all undervalued firms catch Buffett’s fancy. Here are three reasons why.
According to Buffett, the best businesses to invest in are those with steady and reliable growth prospects. This cannot be said of Boeing following the developments of the last couple of months.
A case in point is the grounding of the 737 Max. Months after the fatal twin crashes involving the commercial jet that was supposed to be a money-spinner for Boeing, the single-aisle plane is yet to return to service.
Boeing also faces myriad risks this decade. This includes the possibility of the EU slapping retaliatory tariffs on Boeing in retaliation over U.S. tariffs on Airbus.
Amidst the challenges that Boeing is facing, the aerospace and defense giant is considering cutting research and development expenditure to preserve cash. This increases the risk that competitors will pull ahead. Boeing’s reputational damage has already cost the company contracts to rival Airbus.
Aerospace and defense is not an industry Buffett knows well. The closest Berkshire Hathaway has come to investing in this sector was acquiring Precision Castparts, a maker of parts used in aircraft engines and industrial gas turbines, four years ago.
Of the 48 stocks that Berkshire Hathaway owns, none belong to the defense sector. For decades Buffett’s favorite sectors have been consumer goods, transportation, insurance, banking as well as energy and healthcare to a lesser extent. When Buffett has stepped out of his comfort zone, it has been with high-growth stocks such as Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Boeing fails that test.
Even if Buffett decides to dip his toes in the aerospace and defense sector, Boeing might not be the most attractive stock. Relative to other aerospace and defense stocks such as Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), Boeing is pricey. That’s despite falling by around 25% from the all-time high of $446 last February.
Specifically, Boeing boasts a price-to-earnings ratio of around 51 compared to 19 for Lockheed and Northrop.
Additionally, this is not the best time to buy stocks based on Warren Buffett’s own yardstick. Going by one of his more famous quotes, it is time to be fearful rather than greedy.
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Last modified: June 12, 2020 7:26 PM UTC