FTSE-listed stocks are not well represented in the portfolio of Warren Buffett‘s Berkshire Hathaway.
In fact, my research indicates that there is only one FTSE-listed firm within the legendary investor’s portfolio. And that company is Diageo (LSE:DGE).
However, it’s worth noting that Berkshire Hathaway doesn’t actually own any of the FTSE-listed shares, just shares listed on the NYSE (NYSE:DEO).
What does this mean for UK stocks?
Well, when one of the world’s most famous investors doesn’t buy UK stocks even when the pound is weak, that isn’t exactly the best sign for the health of the British economy or the prospects of FTSE-listed companies.
However, I’m not going to read too much into it. Sometimes it seems like our friends state-side have a more negative outlook on the UK than we do ourselves. If you’ve ever read the New York Post, it’s not hard to see why.
But it’s worth noting that Buffett has traditionally had more UK-listed or UK-based stocks within his Berkshire Hathaway portfolio than he does today.
Rewind five years, and Berkshire Hathaway had stakes in Tesco, what was then GlaxoSmithKline, Walmart, which previously owned Asda, as well as a private US holding company that owned utilities firms in the north of England.
Why Diageo?
Naturally, I don’t know exactly why Diageo is a part of the Berkshire Hathaway portfolio. But I can take an educated guess.
Buffett’s previous holdings in the UK — as noted above — are predominantly defensive stocks. A defensive stock is a stock that demonstrates relatively stable performance regardless of the current state of the economy.
Diageo is multinational alcoholic beverage company, with its headquarters in London. Alcohol has some defensive qualities, but it’s not a necessity for consumers. In recent weeks we’ve seen UK alcohol consumption fall year on year in the lead up to Christmas and as the cost-of-living crisis bites, but not by much.
But Diageo also has defensive qualities through the strength of the brands it owns, such as Johnnie Walker, Guinness, Baileys, and Smirnoff. And brands are important. Even when times get tough, customers tend to stick with the brands they know and love.
It’s also worth noting that these product lines also have considerable appeal in developing economies where brands take on more of a status symbol.
One reason I like Diageo is its international reach and the fact that it makes a good proportion of revenue overseas. Upwards of a third of its sales ($6bn) come from North America. This is around double the company’s earnings in Europe.
And, with the pound weak, these dollar earnings appear inflated when converted back into pounds.
I don’t own any Diageo shares, but it’s something I’m looking at very closely right now. One thing that concerns me is that Deutsche Bank recently lowered its target price on the drinks maker from 3,350p to 3,160p. The current share price is 3,666p, considerably above the price target.
With a price-to-earnings ratio of 24, it’s not the cheapest either. But I do have faith in its ability to grow into developing markets. Right now, I’m not buying, but I’ll reassess in the New Year.
