As always, Warren Buffett has been the focus of untold attention this year -- some of it negative, as Berkshire Hathaway's investment returns have lagged behind the market's rally (due in part to a struggling banking-focused portfolio). Nevertheless, the fabled investor is still full of good ideas and has made some fortuitous purchases as of late.
The next boom in digital payments?
StoneCo is a leading digital payment upstart in Brazil, and has quickly carved out a lead in e-commerce (with Stone reportedly responsible for over half of the country's online transactions this year). But since e-commerce is still a tiny mid-single-digit percentage of retail purchases in Latin America, I think StoneCo is the Buffett stock to be most excited about.
Case in point: Thanks in no small part to Brazil's efforts to clamp down on the coronavirus with social distancing and shelter-in-place orders during the second quarter, StoneCo still reported a 28% and 14% year-over-year increase, respectively, in total payment volume and revenue. According to the last quarterly update, July payment volumes had surged to a 129% rate of expansion over 2019. And though it's in high-growth mode, this is a highly profitable company with adjusted net margins of 22.5% during the last quarter.
Buffett has drawn some criticism in recent years for not investing more in the digital payments boom (although the payment network duopoly Visa and Mastercard are among the positions in Berkshire's portfolio now). The global digital payment industry is far from losing steam, especially in developing markets like Latin America. That's what's so intriguing about Berkshire's investment in StoneCo, a small purchase likely made by one of the company's portfolio managers.
This is not a value-investor stock often associated with the Berkshire portfolio. StoneCo trades for about 23 times trailing-12-month sales -- a figure that assumes this company will continue growing at breakneck speed and that its proposed acquisition of fellow Brazilian commerce software outfit Linx goes through.
In spite of the steep price tag, though, there is massive potential here for this small technologist: It currently has a market cap of only $15 billion and wide-open space to continue promoting digital business transactions in Latin America's largest economy.
Real estate is really down, but definitely not out
Shifting gears to value and unrecognized potential, Buffett and company added to their position in STORE Capital this year. Though real estate needs may have been changed forever, the single-tenant service-sector buildings this real estate investment trust (REIT) specializes in could fare far better than most. With a 25% decline in share price in 2020 to date, I've been a buyer this year as well.
That's not to say STORE is in stellar shape right now. A decent chunk of its properties (a mid-teens percentage of the total) have long-term tenants in the restaurant industry, as well as quite a few in the entertainment space (like movie theaters). Not exactly warm-and-fuzzy-feeling industries to be invested in right now. Nevertheless, while far from perfect, STORE is doing much better than many might have thought: 85% of base rents were collected in July, with the vast majority of the rest negotiated under interest-bearing deferral agreements.
Still not persuaded this is a long-term value? Even though many tenants are facing a cash crunch, STORE's revenue was still up 2% year over year during the second quarter thanks to growth of its portfolio and interest income. Adjusted funds from operations, the equivalent of earnings for a REIT, did fall 5%, but were still more than enough to easily cover the dividend, which currently yields 5.1%.
Of course, STORE will still benefit most from a return to some sort of normalcy in the economy. But I like this REIT's odds because many of its properties are in suburban areas that Americans show signs of wanting to flock to in the wake of COVID-19. And paired with a solid stream of income from its real estate portfolio, I think this is one solid long-term value investment right now.
A grocer sees its digital transformation pay off
It's been a while since I/ve caught up with any grocery store stocks because it's taken years for these companies to generate any kind of profitable growth. It's not as if retail is a particularly high-margin business model, and basic food and household-goods distribution is especially competitive. Let's also not forget that a certain disruptive tech company called Amazon has been busy reshaping the retail world as we know it.
But with the pandemic, grocery store operators like Kroger have started receiving renewed attention from consumers. According to the U.S. Census Bureau, grocery store sales have surged 13% higher through the end of July. This bodes well for Kroger's fiscal-second-quarter report, due out Sept. 11. Q1 provides a preview of the kind of results that could be in store: Excluding fuel, sales grew 19%, propped up by 92% growth in digital sales -- leading to a 57% increase in net income from a year ago.
With years of digital transformation finally paying off as shoppers opt for online sales tools and pickup-and-delivery options, Kroger's stock has been off to the races this year: up 22% so far in 2020 as of this writing. Even partial continuation of first-quarter momentum could be enough to keep this stock headed higher. And longer term, it's looking highly likely that new digital consumer behavior may stick around even after the coronavirus has been beaten, which would also play to this grocery store leader's benefit.
Kroger stock currently trades for just 7.6 times trailing-12-month free cash flow. It's an incredibly cheap price for a reason. As I mentioned before, groceries are not a highly profitable industry (just under 3% net margin in Q1), and beyond 2020, growth rates will likely return to the realm of low- to mid-single-digit percentages. But in the meantime, likely gains in the bottom line and a dividend yielding 2% make this stock look attractive.