Despite an investor stampede for the exits in the month of March that put a lot of stocks on sale, Warren Buffett's Berkshire Hathaway did surprisingly little stock buying in the first quarter. But the Oracle of Omaha has never been too concerned about passing up opportunities, famously saying: "The stock market is a no-called-strike game. You don't have to swing at everything -- you can wait for your pitch."
One good reason Buffett needn't lose any sleep over missed chances is that he's already put the ball into play on many occasions by buying some of the best businesses on the planet. His larger positions may be well known, but two of the smaller holdings in Berkshire's portfolio have excellent long-term prospects and stand out as bargains to consider buying in June. Brazilian payment processor StoneCo (STNE 1.67%) and retail landlord STORE Capital (STOR +0.00%) have been beaten down during the COVID-19 scare, haven't recovered yet, and are likely to produce handsome returns for investors with a patient mindset.
Warren Buffett. Image source: The Motley Fool.
StoneCo
Deaths from the COVID-19 pandemic are trending downward in the U.S. but are still on the rise in Brazil, casting a pall on stocks in that country that's just started to lift in the last half of May. But first-quarter results from Brazilian financial technology company StoneCo revealed rapid growth before the pandemic hit and a business that's already bouncing back smartly.
StoneCo offers a variety of services to help its Brazilian clients process financial transactions and grow their businesses. The company's software facilitates payments -- at the point of sale in physical stores, online, or through mobile apps -- by connecting merchants to electronic payment networks. It also sells software for streamlining business processes and is expanding into banking and credit solutions for its small and medium business clients.
Total payment volume (TPV) grew 42.1% in the first three months of the year, which is particularly impressive considering it actually fell 4% in the second half of March because of the impact of COVID-19. Prior to the onset of the pandemic, StoneCo was on track for 52% TPV growth, up from 51% in Q4. The company increased its active client base by 7.3% from the previous quarter and 72% year over year. Growth in transaction fees, subscriptions, and financial income drove a 34% increase in the top line, compared with Q1 last year.
StoneCo should get back on track to growth over 40% after the pandemic subsides, but the company pointed to signs the recovery is already well under way. April TPV growth was 9.1% and May's TPV growth through the 23rd was back up to 22.9%. As in this country, consumers in Brazil ramped up usage of e-commerce during the crisis -- behavior that's likely to endure past the recovery -- and StoneCo estimates that 51% of e-commerce volume transacted in the country went through its platform in the first weeks of COVID-19.
If you noticed that StoneCo's share price rose a stunning 27% in a single day last week after the first quarter earnings report, you might be thinking that you missed the boat already. Zooming out a little bit gives a better perspective on the stock's value. Warren Buffett got in on the stock's IPO at $24 per share in October 2018, but today's price of around $31 is essentially identical to the close on the stock's first day of trading, when the company had less than half the active clients it has today. Shares are still 33% below their all-time high in March and a good value for such a promising business.
STORE Capital
Meanwhile, in the U.S., retail businesses that have been curtailed or completely shut down by the pandemic are struggling to get back on their feet, and investors haven't yet warmed up to the stocks of their landlords. STORE Capital is the only real estate investment trust (REIT) in Warren Buffett's portfolio and the stock has been pounded, down 51% from its high earlier this year.
The market's concerns are justified, at least in the short term. STORE Capital focuses on properties leased to single tenants in middle-market service businesses, such as restaurants, early childhood education centers, health clubs, and movie theaters. In other words, the company depends on rent payments from some of the businesses hardest hit by COVID-19 shutdowns.
However, the company has a very conservative business model, a feature that was probably one of the attractions for Buffett. STORE leases on a triple-net basis, and only accepts tenants who can demonstrate unit-level profitability at the leased location. It's also very diversified geographically and across a broad tenant base. It has 491 tenants in 110 industries, leasing 2,552 properties in 49 states, with no one tenant representing more than 3% of annualized rent.
Results for the first quarter, reported on May 5, reflected healthy 14% top line growth and a slight increase in adjusted funds from operations, but what investors were most interested to hear about was the status of rent collections with so many tenants shutting down. STORE reported 68% collection of April rent, which was a reasonable outcome, but on the conference call said that May would be a more difficult month. On the positive side, the company said it had plenty of cash to ride out the tough times: $550 million, 2.5 times 2019 operating expenses plus annual cash interest expense, with no significant debt maturities in the rest of the year.
Now we know that May collections were better than the company had feared. On May 27, STORE held a conference call and said that the company had received only two new rent deferral requests during the month, amounting to less than $50,000 in monthly rent, and that collections were about 64% of scheduled May rent. Also, 85% of its tenants were open or partially open, compared with 65% a month ago, portending well for June collections.
STORE Capital is on the road to recovery and has plenty of cash to survive and even to invest in new properties when bargains appear. Shareholders may face a dividend cut or suspension when the board meets in June, but the market already seems to be anticipating that outcome, with the yield presently at 7%. Meanwhile the stock is selling at only 1.07 times book value, a bargain that certainly must appeal to Warren Buffett and represents an opportunity for investors with a similar patient and long-term perspective on investing.
