Warren Buffett's Best-Performing Stock of 2019 May Be Unknown to Most Investors

Technology

Published: August 29, 2019 10:40 am

Last Updated: January 30, 2020 4:48 pm

Investors usually love hearing about new ideas and opportunities. They don’t always act just because a company’s story sounds good, but sometimes they do, or at least put it on a watch list of sorts. When investments are made by Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A), the investing public often digs deeper into the company. After all, if one of the top investors of the modern era is buying it, then there must be some perceived value there. StoneCo Ltd. (NASDAQ: STNE) is one of those companies that much of the investing public has never heard of, or if they have heard of it, that’s only recently.

Berkshire Hathaway disclosed that it had a stake in StoneCo during the fourth quarter of 2018. The company had just come public on in October of 2018, with an initial public offering of more than 50 million shares at $24 per share.

What is amazing here, even after its shares have pulled back from the peak, is that StoneCo is currently the highest percentage gainer in 2019 out of the dozens of individual stock holdings owned by Berkshire Hathaway and Buffett. This stock was up over 100% in March, but even after a big gap down in April, it is still up 66% year to date.

While it is unusual to see Berkshire Hathaway involved in an IPO, the StoneCo amended IPO filing ahead of its pricing had indicated right up front that Berkshire Hathaway had indicated an interest in purchasing up to 14,166,748 of StoneCo’s class A common shares in the offering at the IPO price. Other large holders, like T. Rowe Price, had shown an interest in purchasing up to 9.54 million shares as well. As of June 30, 2019, T. Rowe Price was the largest holder, with 35.16 million shares (12.69% stake), and Berkshire Hathaway was the second-largest holder with 14.166 million shares (5.11% stake).

As far as what StoneCo Ltd. does for business, this Brazil-based financial technology solutions provider connects merchants and their partners for e-commerce transactions, in-store transactions and mobile channels in Brazil. Its proprietary system is the core product on top of services and sales support for small merchants and entrepreneurs up to large merchants. By the end of 2018, StoneCo served roughly 267,000 clients.

Buffett and his team generally do not care about Wall Street analyst target prices, but other investors might. While shares are at $30.45 today, StoneCo’s current consensus target price from Refinitiv is about $34.50. That is up over 10% from the current price, but it is handily lower than its 52-week high of $45.62.

On August 29, JPMorgan reiterated its Neutral rating on StoneCo but raised its target to $31 from $26. Earlier in the summer, ahead of its August earnings, Goldman Sachs initiated it with a Buy rating and a $37 target price, and Cantor Fitzgerald initiated coverage with an Overweight rating and a $33 target.

Perhaps more important than what analyst price targets are, and something that Team Buffett may actually pay attention to sometimes, is the growth that has happened and what is expected ahead. StoneCo’s revenues of $728.3 million in 2018 were up over 100% from the $329.1 million in 2017. Refinitiv’s consensus estimates call for revenues to reach $600 million in 2019 and almost $825 million in 2020.

What also stands out here is that Buffett’s portfolio managers chose to ignore the earnings ratios. With adjusted earnings of $0.37 per share in 2018, it had a backward price-to-earnings ratio of over 80, but consensus per-share earnings estimates of $0.74 and $1.04 for 2019 and 2020, respectively, value the company at 41 times this year’s anticipated earnings and 29 times next year’s.

One interesting thing about StoneCo is that it has very large short interest. While it is down from a peak of more than 12 million shares sold short ahead of the April lock-up, the mid-August short interest was about 10.2 million shares. Nasdaq showed that as being 3.5 days to cover and almost 9% of the float.

StoneCo’s 52-week trading range has been $16.14 to $45.62, and its current market cap is about $8.5 billion.