Warren Buffett is nervous. His holding company Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) made some startling transactions towards the end of 2020. These moves weren’t the sign of someone who is bullish.
There are certain areas of the market that the guru is specifically avoiding, even if that means selling some of his most cherished stocks.
Sell these stocks now
Late last year, Bloomberg ran a headline that few believed they’d ever read: “Buffett Inches Toward Wells Fargo Exit.”
Wells Fargo (NYSE:WFC) has long been considered a permanent position in Berkshire Hathaway’s portfolio. It’s been a multi-billion-dollar bet for years. For the position to be decreased, something must be seriously wrong.
“Buffett spent three decades praising Wells Fargo, making it the conglomerate’s largest stock investment at times, and in turn becoming the bank’s top shareholder,” Bloomberg explained. “He stuck with it through the 2008 financial crisis and showcased it at his company’s festive annual meeting, even having family members delivered in one of the bank’s iconic stage coaches.”
In 2019, Berkshire owned roughly 9% of the company. That ownership figure is now closer to 3%. This is a massive move from an investor famous for long-term thinking.
But Wells Fargo wasn’t the only financial stock Buffett sold last year. He also trimmed positions in other banks, including JP Morgan, a stock he’s complimented countless times. What’s going on?
At the end of the day, bank stocks are leveraged bets on the economy. These businesses do well when the economy does well. When the economy crashes, these stocks can fall by 50% of more. We experienced that first-hand during the financial crisis of 2008.
By reducing his positions rapidly, especially in long-term holdings like Wells Fargo, Buffett is signaling that he’s bearish on the 2021 economy. He understands that these companies will be the first ones on the chopping block if things go sour, and he’s reducing his exposure ahead of time.
Buffett also hates these stocks
It’s not just bank stocks. Buffett’s also nervous about airlines like Air Canada (TSX:AC).
In 2020, Air Canada lost nearly $1 billion every 90 days. To put that in perspective, its total market cap is only $7.5 billion. To stem the losses, management created new debt, issued millions of new shares, and sold planes. These measures are not sustainable forever.
With vaccines on the way, many think airline stocks are about to spike. Not Buffett. He sold all of his airline shares last summer, and he’s not preparing to return anytime soon.
The problem is classic supply and demand. Demand remains 90% below 2019 levels, yet there are still just as many planes. This mismatch should push nearly every airline to lose money again in 2021.
“We will not fund a company where we think that it is going to chew up money in the future,” Buffett stressed.
How to invest now
Buffett’s advice is clear: avoid economically sensitive stocks like banks and airlines. He’s not saying these businesses will fail in 2021, only that the risk/reward balance isn’t skewed in your favour.
He’s still buying other stocks, but these are off the table.
We think Buffett could buy the stocks on our 2021 Buy List below…
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The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned.