Warren Buffett massively underperformed in 2020. With Berkshire Hathaway stock up only 2.5% for the year, his returns were worse than those of the S&P 500. While some of Berkshire’s portfolio stocks–like Apple –did well, though Berkshire itself did not. Further, the Berkshire portfolio had many duds, such as Suncor Energy (TSX:SU)(NYSE:SU), and all of the airline stocks that Buffett sold out of.
Heading into 2021, Buffett has everything on the line. After shedding airlines and trimming banks, he appears to be sticking with what he’s got. And as you’re about to see, it’s a risky place to be. Buffett’s energy and bank holdings are extremely vulnerable to a slower-than-expected COVID-19 recovery. His favourite tech stock, on the other hand, could take a beating for other reasons.
In this article I’ll explore Buffett’s holdings in early 2021, and why he truly “has it all on the line” in the year ahead.
Substantial bets on banks and energy
In 2020, Buffett substantially reduced his exposure to COVID-19-ravaged stocks. He got out of airlines entirely and trimmed banks and energy stocks. Buffett isn’t getting back into airlines any time soon. But he still has several positions in banks and energy stocks–both of which are vulnerable to a slower than expected COVID-19 recovery.
Suncor Energy is one energy stock Buffett is still holding onto in 2021. In 2020, it ran three consecutive net losses in a row. Its first quarter net loss was particularly massive, coming in at $3.5 billion. It did better in terms of cash flow, but still had a rough year. The COVID-19 pandemic reduced demand for gasoline and jet fuel, taking a huge bite out of Suncor’s business. In 2021, Suncor could recover. But if the pandemic–and lockdowns–go on longer than expected, the stock won’t recover to a point where Buffett makes gains on it.
Buffett also has heavy exposure to banks like Bank of America. Banks were another sector that got hit hard by COVID-19, though not nearly as much as energy or airlines. Some Canadian banks, like the Toronto-Dominion Bank, are already back to posting positive year-over-year earnings growth. Buffett’s BAC, on the other hand, is still reeling, with revenue and earnings down year-over-year. So this is another Buffett play that’s vulnerable to a slower-than-expected post COVID recovery in 2020.
Tech stocks: threatened by the recovery?
Tech stocks are another part of Buffett’s portfolio that’s vulnerable to a completely different possibility: a very fast COVID-19 recovery.
There’s a widely held belief that tech stocks will decline as investors move into traditional industries once the economic recovery gets underway. Banks, energy stocks and airlines are all “beaten down,” meaning they have upside when the headwinds abate. That could take some wind out of tech stocks’ sails.
Right now, Warren Buffett’s single biggest stock holding is Apple. If a post-COVID resurgence in traditional industries takes a bite out of tech, then this Buffett holding is likely to stumble. That would hit Buffett much harder than, say, Suncor taking a hit, because AAPL is a much bigger position for him than SU. On the other hand, the same factors that would harm Apple could benefit Suncor and Bank of America, so there’s potential upside here too.
Some of these stocks are classic Warren Buffett picks:
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Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK. David Gardner owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares) and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares).