Three small Berkshire holdings that I think are worth buying right now are StoneCo (NASDAQ: STNE), STORE Capital (NYSE: BIG), and Kroger (NYSE: KR).
The next boom in digital payments?
StoneCo is one of the leading digital payment entrants to Brazil and has quickly carved out a niche for itself in e-commerce (Stone is believed to be responsible for more than half of the country’s online transactions this year). But since e-commerce is still a small to mid-digit percentage of retail purchases in Latin America, I think StoneCo is the Buffett is the most excited.
Case in point: Thanks in large part to Brazil’s efforts to combat the coronavirus with social distancing and shelter-in-place orders in the second quarter, StoneCo again reported a 28% and 14% year-over-year increase. ‘other, respectively, in total payment volume and turnover. According to the latest quarterly update, July payment volumes had jumped at an expansion rate of 129% from 2019. And although it is in high growth mode, it is a business. very profitable with 22.5% adjusted net margins in the last quarter.
Buffett has drawn some criticism in recent years for not investing more in the digital payments boom (although the payment network duopoly Visa and MasterCard are currently among the positions in the Berkshire portfolio). The global digital payment industry is far from faltering, especially in developing markets like Latin America. This is what is so fascinating about Berkshire’s investment in StoneCo, a small purchase likely made by one of the firm’s portfolio managers.
This is not a valuable stock for investors often associated with the Berkshire portfolio. StoneCo is trading around 23 times the sales of the past 12 months – a figure that assumes that this company will continue to grow at breakneck speed and that its plan to acquire Brazilian commerce software company Linx passes.
Despite the high price tag, however, there is huge potential here for this tiny technologist: he currently has a market cap of just $ 15 billion and a wide open space to continue promoting digital business transactions in the world’s largest economy. Latin America.
Real estate is really below, but certainly not outside
Shifting gears to value and unrecognized potential, Buffett and the company have strengthened their position in STORE Capital this year. While real estate needs may have changed forever, the properties in the single-tenant service industry that this Real Estate Investment Trust (REIT) specializes in could fare much better than most. With a 25% drop in the share price in 2020 to date, I have been a buyer this year as well.
That doesn’t mean STORE is in great shape right now. A good chunk of its properties (a mid-teens percentage of the total) have long-time tenants in the restaurant industry, as well as many in the entertainment space (like movie theaters). These aren’t really warm, fuzzy industries to invest in right now. Nevertheless, while far from perfect, STORE is doing much better than many might have thought: 85% of base rents were collected in July, with the vast majority of the rest being negotiated under deferral agreements. interest bearing.
Still not convinced that this is a long-term value? Even though many tenants are facing a cash flow crisis, STORE’s revenue still grew 2% year over year in the second quarter thanks to its portfolio growth and interest income. Funds from Adjusted Operations, the equivalent of a REIT’s earnings, fell 5%, but were still more than enough to easily cover the dividend, which currently pays 5.1%.
Of course, STORE will always benefit the most from a return to some kind of normalcy in the economy. But I like the odds of this REIT, as many of its properties are located in suburban areas that Americans are showing signs of wanting to flock to as a result of COVID-19. And coupled with a solid stream of income from its real estate portfolio, I think it’s a solid long-term value investment right now.
Grocer sees digital transformation pay off
It’s been a while since I caught up with grocery store stocks because it took years for those companies to generate profitable growth. It’s not as if retail is a particularly high-margin business model and the distribution of basic food and household products is particularly competitive. Let’s also not forget that a certain disruptive tech company called Amazone has been busy reshaping the retail world as we know it.
But with the pandemic, grocery store operators like Kroger have started to receive renewed attention from consumers. According to the US Census Bureau, grocery store sales increased 13% through the end of July. This bodes well for Kroger’s second quarter budget report, due on September 11. The first quarter provides a snapshot of the kind of results that could be in-store: Excluding fuel, sales grew 19%, supported by a 92% growth in digital sales – leading to a 57% increase in bottom line compared to to a year ago.
With years of digital transformation finally bearing fruit as shoppers switch to online sales tools and pickup and delivery options, Kroger’s stock has been racing this year: up 22% to ‘now in 2020 as of this writing. Even a partial continuation of the momentum of the first quarter could be enough to keep this stock on the rise. And in the longer term, it seems very likely that the new digital consumer behavior could persist even after the coronavirus has been defeated, which would also work to the benefit of this grocery store leader.
Kroger stock is currently trading for only 7.6 times free cash flow over the past 12 months. It’s an incredibly cheap price for a reason. As I mentioned before, groceries is not a very profitable industry (just under 3% net margin in Q1), and beyond 2020, growth rates will likely return to the kingdom. low to medium single digit percentages. But in the meantime, the likely gains in net income and a 2% dividend make this stock attractive.