The unsafety here lies not within the method itself (though it has its problems, too) but at the call site. The use of S for the input argument's type as well as for the return value tells the compiler, that whatever the type of object may be that is passed to the function, the result has the same type (or a derived type, actually).
Thus, the compiler is allowed to assume, that in the call
foo("hello, world")
the result will be a java.lang.String, while in the call
foo(new StringBuffer("hello, world"))
the result will be a StringBuffer, and so on. In both cases, however, your method does not return what it was supposed to return, namely, an object of the same type as the input argument. Instead, a StringBuilder is returned.
Actually, the only kind of input argument your method will work with is a StringBuilder, anything else will be doomed to crash with a ClassCastException sooner or later, as the compiler might (and often does) insert (hidden) casts at the call sites.
And of course, as others have already pointed out, the use of generics is not really necessary here, anyway.