Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Doug Kass: I'm still short IBM and Coke

Douglass Kass
Amanda Gordon | Bloomberg | Getty Images

As Doug Kass sees it, "IBM" just as easily could stand for "I need Buffett's Money."

The head of Seabreeze Partners Management believes the company more formally known as International Business Machines is experiencing a fundamental growth problem that is making Warren Buffett's investment in the company look unwise.

Specifically, he thinks IBM is facing an innovation challenge in which the company's base as a leader in data management is under fire from cloud computing, an arena in which it is not suited to play.

What's more, he also believes the Oracle of Omaha is in trouble with his investment in Coca-Cola.

IBM CEO honored to have Buffett
IBM CEO honored to have Buffett

In fact, Kass has been bearish on both IBM and Coke since at least February, when he sent a note to clients outlining his feelings about why Buffett's "moats appear to be vanishing," a reference to the head of Berkshire-Hathaway's "changing acquisition strategy that settled for moat-less or less threatening moats—that is, large cash flow and market share elephants rather than significantly undervalued gazelles that faced a long runway of growth ahead."

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Kass retains his conviction to short not only Coke and IBM though he's taken off his short in Berkshire, a company he had considered looking more and more like an index fund rather than a company looking for those "gazelles." On Monday, Kass resent clients the note he first issued in February outlining his position on the three firms, then sent a follow-up note to with his colorful take on what IBM really might stand for. Kass was short Berkshire then, but said Monday that he has since changed that position.

The move came the same day that IBM reported quarterly earnings that disappointed Wall Street, sent shares lower by more than 6 percent and served as a weight for the Dow Jones Industrial Average, which was negative in Monday morning trade.

Much of the note entailed the recollection of the 2014 Berkshire Hathaway shareholder meeting, when Kass was asked to speak as a "credentialed bear" as to why he was sour on the company.

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The Coca-Cola and IBM holdings, which he said constitute about one-sixth of Berkshire's total market cap, were at the core of the argument:

While IBM and Coca-Cola started out as forever holdings for Warren, developing headwinds have unexpectedly surfaced and have threatened what might have been previously considered impenetrable franchise moats.

While there is recent evidence that both companies are trying to adapt to a changing industry environment (through internal moves and growth by acquisition), it is unclear whether the needles of growth can be moved significantly over the next few years in order to diminish the headwinds.

On the two companies specifically:

IBM faces a serious competitive threat from the cloud. (As Stanley Druckenmiller said on Bloomberg TV, "Buy IBM if you want to be short innovation.")

Coca-Cola faces a secular deterioration in the carbonated soft drink market ... as healthier drink choices rip into their market share.

Berkshire Hathaway Portfolio Tracker

For Kass, IBM has been a smart short—shares have tumbled 9.45 percent in 2014 and 11.8 percent over the past three months.

Coke has been less profitable for him; it's up 5 percent year to date, doubling the performance of the .

Representatives from Berkshire, IBM and Coca-Cola did not immediately respond to requests for comment.