This Warren Buffett Stock Looks Like a Great Buy Today

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Some investors feel pulled to Warren Buffett’s stock picks like a magnet, hoping that if they follow his lead, their portfolios might imitate to some degree the wild success of Berkshire Hathaway, the conglomerate he runs. But individual investors have different goals and resources when compared to a holding company with a $700 billion market cap, and Buffett’s not-necessarily secret recipe is very unlikely to produce the same results for anyone who tries to replicate it.

It does, however, make sense to look at the various stocks he buys and consider whether specific companies make sense for your portfolio. Buffett and his investment management crew tend to favor companies that have competitive moats, are well-managed, and whose shares look undervalued. These are generally good investment strategies for any long-term investor to consider.

One of the more recent additions to Berkshire Hathaway’s portfolio is Brazilian fintech company StoneCo (STNE 5.76%). Its stock price is down almost 70% since he first opened a stake in it, for reasons both internal and external. But at the current price, it’s looking like a great buy.

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Digital solutions for small businesses

StoneCo provides fintech solutions such as digital payments and management systems to entrepreneurs and small businesses in Brazil, a large country in South America with a population of more than 200 million. The company’s similar to the Square segment of Block, or its original seller-focused business. These include hardware such as point-of-sale devices, all sorts of payment technology solutions, and full e-commerce systems, similar to those provided by Shopify

The company has been growing quickly — maybe too quickly. To achieve its healthy top-line gains, it has boosted expenses, its losses have been mounting, and profitability has suffered. It was hit with a major challenge last year when the Brazilian government made some regulatory changes to the credit system. Those severely impacted StoneCo’s legacy credit portfolio. The company had entered the credit space without being adequately prepared for changes. That led to problems when interest rates rose and new regulations came into effect. It also waited too long to pass increased costs along to customers as price increases. And it expanded overall very quickly in an effort to harness new opportunities, spreading itself too thin.

Management has responded by making some fundamental changes to how it runs the business. It’s revamping its credit system, and it reorganized into two segments — financial services and software — for a sharper focus. It also made key adjustments to the executive team and reevaluated its pricing system. While those changes may temporarily put a damper on client additions, they should boost profitability and stabilize the business.

Can StoneCo grab the opportunity in front of it?

Despite facing outsize pressure last year, in the fourth quarter, the company’s revenue increased 87% year over year to 1.9 billion Brazilian reals ($400 million), and its take rate increased to 1.71%. It added a record 378,000 new clients — more than three times as many as in the prior-year quarter — bringing its total to 1.77 million. Total payment volume increased 55% over 2020, excluding the government-sponsored “Coronavoucher” program, and 87% for its core small businesses. Banking clients steadily increased to reach 492,000 by the end of the quarter, and average revenue per banking client increased as well.

StoneCo management clearly knows how to grow the business. But it has learned that that’s not enough. It has already made changes to its pricing system, and while it will take time for those to catch up, it already recorded an uptick in its take rate, from 1.71% in the fourth quarter to 2.02% in January 2022.

With its renewed operations, it has been anticipating a strong start to 2022. For the first quarter, its guidance was for revenue to increase around 116%, and total payment volume to increase around 80% year over year. It’s also expecting margins to improve. It will deliver its first-quarter report on Thursday, June 2.

Is now the time to buy?

One could argue that StoneCo stock is a risky play. Management is going through an overhaul, the company recently restructured, it faces plenty of external headwinds, and losses are still mounting. 

However, its growth potential is huge, and management has demonstrated that it’s able to recognize its errors and find ways to move forward. That’s a great sign. 

Considering all of these factors, what moves the stock into buy territory is its valuation. After falling 40% this year, shares are trading at 3 times trailing 12-month sales and 27 times forward one-year earnings. It makes sense that the stock is that cheap since the company is dealing with so many unknowns. But if you can stomach some risk, StoneCo’s potential and management’s effective approach to dealing with its problems appear to outweigh what should be temporary challenges. Investors should expect gains from StoneCo stock in the long term.