This Small Cap Stock Is Warren Buffett’s Best Performer in 2019
So far in 2019, Warren Buffett’s best performing stock was not any of the large cap financials that make up the lion’s share of Berkshire Hathaway’s portfolio. It’s not Amazon either, which Berkshire took a massive stake in at the beginning of May.
Although since that historic acquisition, which Buffett called himself “an idiot” for not making years ago, Amazon’s stock has risen along with the rest of the stock market. (Here’s why you might consider adding Shopify to your portfolio along with Amazon.)
An Unusual Warren Buffett Stock Pick
The best Q1 – Q2 performer in Warren Buffett’s portfolio is a little-known, small cap, fintech stock for a Brazilian startup, StoneCo LTD. At the time of its initial public offering last year, Berkshire snapped up 14 million StoneCo shares at the IPO price.
That was a very unusual move for Warren Buffett’s company. To begin with, Buffett has an aversion to buying at the IPO. He thinks that’s a big gamble. At a Berkshire Hathaway annual shareholder’s meeting in 2016, Buffett said:
You don’t have to really worry about what’s really going on in IPOs. People win lotteries every day.
He’s also astutely warned:
“…out of thousands and thousands and thousands of businesses in the world, an IPO can’t be the most attractive thing, if for no other reason than the fact that sellers have an advantage in deciding when to enter the market.
The StoneCo acquisition also stands out from Berkshire’s typical investments because it’s not really in line with Warren Buffett’s value investing philosophy.
Typically the legendary investor’s firm goes for large-cap U.S. stocks in more established companies that are likely to deliver consistent profits. StoneCo was a growth stock acquisition of a new tech firm in another country. When Berkshire Hathaway swooped in to buy STNE last year, investors took notice.
StoneCo’s Market Share Miracle
StoneCo was founded by André Street and Eduardo Pontes in 2012 after more than a decade working in electronic payments. After a successful venture into payments processing with Braspag, another startup the duo founded, they scrapped the company and started over from scratch with StoneCo.
In the SEC filing for its IPO, StoneCo reported its Q1 2018 revenues of nearly $160 million USD, and a company valuation of $6.1 billion. It had also captured 5.5% of Brazil’s market share by Q2 2018. It had 230,000 clients in Q3.
In six years StoneCo’s founders had created Brazil’s fourth-largest electronic payment processor by transactions volume. They couldn’t have achieved this without technical prowess in electronic payments, but it wasn’t focusing on creating a massively disruptive technical innovation that led to StoneCo’s success.
The company’s success can be attributed to an emphasis on the user, and making a human connection with the customer in the sales and customer service departments.
The company’s clients are comprised of SMB (small and medium sized businesses) that need a payment terminal or software solution to process payments from customers. After acquiring a customer, StoneCo can sit back and earn transaction fees for processing payments. It’s rapidly expanding into other financial products as well.
In the last year StoneCo went from providing payment software to offering digital banking services and lines of credit.
StoneCo shares traded for $35.68 on the NASDAQ at market close Wednesday.
Featured image courtesy of Shutterstock.