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Stock Market News: Why Warren Buffett's Favorite War-on-Cash Stock Soared Wednesday

By Dan Caplinger – Updated May 27, 2020 at 11:23AM

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The market was mixed, with some sectors doing far better than others.

The stock market showed clear signs of a sector rotation on Wednesday morning, as certain parts of the market fared a lot better than others. Doing especially well were some of the hardest-hit sectors from the coronavirus pandemic, which continued to gain ground on hopes that a reopening economy will restore their prospects. But the go-to stocks that many investors chose to weather the COVID-19 crisis gave up considerable ground.

As a result, just before 11 a.m. EDT today, the Dow Jones Industrial Average (^DJI 2.80%) was up 107 points to 25,103. However, the S&P 500 (^GSPC 3.06%) was down 15 points to 2,977, and the Nasdaq Composite (^IXIC) fell 178 points to 9,162.

Warren Buffett remains one of the most closely followed investors in the world, even though his Berkshire Hathaway (BRK.A 2.63%) (BRK.B 2.82%) hasn't fared as well as the broader market over the past year. Today, Berkshire's picking up ground, but the insurance giant's 2% gain pales in comparison to how one of Buffett's choices for the Berkshire portfolio is doing. StoneCo (STNE 10.81%) is lighting up the market with its gains, and the Brazilian company's performance offers some new perspective on the state of the global economy.

Warren Buffett, with several people behind him gathered together.

Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.

Leaving no stone unturned

StoneCo stock jumped 23% following the financial-technology solutions provider's first-quarter report. Although the Brazilian economy took a hard hit from COVID-19 toward the end of the period, the payment company's numbers held up better than many had feared.

StoneCo's total payment volume jumped 42% during the first quarter of 2020 versus year-earlier figures, with revenue jumping 34% year over year. Adjusted net income was higher by 23%, and StoneCo managed to attract more than 50,000 new clients during the quarter to bring its total customer base to more than 530,000 merchants. That doesn't include what StoneCo calls micromerchants, the smallest businesses that rely on the payment service.

The company has also seen considerable success with some of its new product offerings. StoneCo's banking solution jumped from 79,000 accounts in January to 122,000 in March, and the company has seen record numbers of account openings in April. Meanwhile, StoneCo is moving even more aggressively into the e-commerce business in Brazil, and that strategy has paid off with market share in the South American economic giant of greater than 50%.

Why StoneCo has further to go

To be clear, the COVID-19 pandemic is hurting StoneCo. The company expects higher delinquency rates in its credit portfolio as a result of economic stress from coronavirus-related disruptions, although StoneCo has taken measures to mitigate the effects of weaker creditworthiness among its merchant clients. The company made the tough decision to lay off about 20% of its workforce in early May.

Moreover, growth has slowed since the end of the first quarter. The company estimates that total payment volume was up just 9% in April after falling 4% in the second half of March from year-ago levels. But May growth figures weighed in at 23%, suggesting that the economy is starting to recover.

Buffett knows the financial industry, and his decision to invest in this fintech stock during its earliest days as a publicly traded company shows how confident he is in the power of electronic payments and financial innovation. Even with the challenges of COVID-19 disruptions to Brazil's economy, StoneCo is well positioned to get through the worst of it and keep building its business.

Dan Caplinger owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of Stoneco LTD and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

StoneCo Ltd. Stock Quote
StoneCo Ltd.
$11.69 (10.81%) $1.14
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$30,316.32 (2.80%) $825.43
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,790.93 (3.06%) $112.50
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$424,180.00 (2.63%) $10,880.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$280.49 (2.82%) $7.69
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$10,815.43 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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