Warren Buffett is arguably the greatest investor who's ever lived. He's gone from buying his first stock at the age of 11 in 1942 (three shares of Cities Service Preferred for $38 apiece) to managing a portfolio of equities through Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) worth more than $342 billion as of this writing. And he's made many, many people who've invested along with him extraordinarily wealthy in the the process.
That doesn't mean you should buy and hold exactly the same stocks as Warren Buffett does. Buffett has long admitted he doesn't enjoy some of the same advantages of smaller retail investors, particularly in that he doesn't have the luxury of owning many small- and mid-cap stocks (that is, short of acquiring their businesses outright). Given their size, these kinds of stocks generally can't move the needle as part of Berkshire's enormous equity portfolio, which helps explain why Berkshire has focused much of its capital on stable large- and mega-cap names.
One outlier in Berkshire's Portfolio
There is, however, one particularly volatile mid-cap stock in Berkshire's portfolio that I think could be a massive winner going forward: StoneCo(NASDAQ: STNE), a Brazilian fintech company focused on helping local merchants seamlessly conduct commerce whether online or in person.
Berkshire currently owns around 10.7 million shares of the Brazilian fintech company worth a little over $111 million as of this writing -- a roughly 3.5% stake in the company given its $3.2 billion market cap today, and only 0.03% of Berkshire's total portfolio. But if all goes as planned, StoneCo could ultimately grow to be a meaningful slice of Berkshire's equity pie.
Shares of the Brazilian fintech company are up around 20% year to date, though they've also plunged more than 40% from their August highs as the broader market has pulled back. To be fair, this kind of volatility isn't new to most shareholders in the volatile stock (myself included) who've endured a veritable roller-coaster ride since it went public in late 2018.
But that raises the question: Given its recent pullback, will StoneCo be able to resume rallying from here in the near future?
If its most recent quarterly results and progress are any indication, I think so.
First, note StoneCo pulled back hard last month despite posting second-quarter results that handily exceeded expectations; quarterly revenue climbed 28.2% year over year to 2.955 billion Brazilian reals ($0.59 billion) translating to adjusted earnings per share of R$0.94 ($0.18). Both the top and bottom lines were comfortably above the company's own guidance, and most analysts were modeling earnings of $0.85 per share on revenue closer to R$2.89 billion ($0.57 billion).
A massive catalyst (and even bigger TAM)
Better yet, StoneCo enjoys a compelling catalyst in that Brazil's central bank has begun a significant rate-cutting cycle that began with 50 basis-point (0.5 percentage-point) reductions in both August and September -- its first rate cuts in three years. Barring any unexpected upticks in inflation that might convince them to abandon their approach, this pattern will likely continue through at least the first half of next year and could very well extend through the next couple of years. Recall StoneCo previously had to grapple with the fallout of rising rates eating into its profit margins back in 2021. As rates soared while central banks scrambled to bring inflation under control, StoneCo initially resisted passing along resulting increased funding costs to its micro, small, and medium businesses (MSMB) client base before finally beginning repricing initiatives in late 2021 -- a move investors feared might negatively impact the growth rates of StoneCo's MSMB Payments client base. That -- combined with regulatory challenges facing its soon-to-be-relaunched credit product -- is a big reason StoneCo stock slid nearly 80% in 2021.
As it turned out, StoneCo's MSMB business has remained its standout segment. Those carefully timed repricing initiatives were well received and had little impact on StoneCo's growth; MSMB active-payments clients most recently soared 43.3% year over year in Q2 to 2.962 million; MSMB take rates improved 38 basis points to 2.48%; and MSMB total payment volumes grew 19%. Meanwhile, StoneCo has begun to enjoy incredible operating leverage as it scales, with adjusted net income and adjusted earnings before interest and taxes (EBIT) skyrocketing 5.8 times and 5.9 times, respectively, from last year's Q2.
As interest rates continue to decrease in Brazil, StoneCo is perfectly positioned to enjoy significantly greater flexibility as it pertains to balancing that operating leverage with driving superior growth.
Zooming out on its broader long-term opportunity, StoneCo is chasing an estimated R$120 billion ($24 billion) total addressable market (TAM) for payments, software, banking, and credit for micro, small, and medium businesses (MSMBs) in Brazil. That TAM swells to R$200 billion ($40 billion) when you include its Fintech as a Service (FaaS) and full-commerce software offerings. The company also has plans to eventually expand beyond Brazil; management has discussed tackling other "big countries in Latin America," including Colombia, where they believe "financial interest is just opening up" in a similar manner as it has in Brazil the past several years.
Of course, StoneCo's quest to capture as much of this TAM as possible could be temporarily disrupted if inflation rears its ugly head again, causing Brazil's central bank to pause or even reverse its current cycle of easing rates. But considering the company did an admirable job navigating that challenge before, I think the upside for this stock far outweighs the risks today.
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