Does This Berkshire Hathaway Fintech Investment Make Sense?

The world recently learned that Berkshire Hathaway (BRK.A 0.74%) (BRK.B 0.99%) is investing $500 million in a Brazilian fintech start-up, following up on its successful investment in StoneCo (STNE 0.95%). Plus, Bank of America (BAC 3.59%) CEO Brian Moynihan says that consumer spending is 20% higher than it was before the pandemic, and Fool contributor Matt Frankel thinks that could have big implications for the financial sector. Matt and host Jason Moser also discuss the latest mall real estate investment trust (REIT) to file for bankruptcy protection, and each reveals one stock they're watching.

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This video was recorded on June 14, 2021.

Jason Moser: It's Monday, June 14th, I'm your host Jason Moser on this week's financial show, we're going to dig into another big Brazilian investment for Berkshire Hathaway, consumer spending is on the rise. We'll talk a bit about REITs and what investors need to look out for. Wrap things up as always with ones to watch. Joining me this week, it's my man, Certified Financial Planner, Mr. Matt Frankel. Matt, how's everything going?

Matt Frankel: Pretty good, the sun is shining, dogs are asleep on the chair. It feels like a Monday on Industry Focus. Let's do it.

Moser: I love it, I love it. Lazy Mondays with the dog sleeping next to you, that is a good feeling. Well, yeah, let's jump right into it then. Last week, we saw, I think, a very noteworthy headline, Berkshire Hathaway making, for most, a large investment in Brazilian FinTech leader, I guess you could say there. It does seem like this is a leader in the Brazilian FinTech space, Nubank. Matt, let's talk about this for a minute because it feels like Berkshire Hathaway, the business, I mean, we can talk about whether this is something spearheaded by Buffett or his deputies. But at the end of the day, Berkshire Hathaway certainly made some investments in Brazil, seeing this as one of the pockets of opportunity out there today in this newly developing FinTech space. What do we make of this investment with Berkshire? I think it was somewhere in the neighborhood of $500 million investment they made Nubank.

Frankel: Yeah, $500 million, which would be a big investment for anybody but Berkshire Hathaway. It is just under 0.1% of Berkshire's total capital, or their total market cap rather. It could be a needle mover if it's, say, like a 10-bagger, but it's not a giant investment. But having said that, it's not hard to see why Berkshire might like the financial sector in Brazil. Brazil, it's a big country, if you're not familiar. They have over 200 million people in Brazil, and their financial system is not as inclusive as ours. In other words, banking has been dominated for years and years by a few big companies. Think of our big four banks, if there were no one else doing banking.

Moser: Wow.

Frankel: As a result, there have been millions of people shut out of the traditional financial system. We talked about the unbanked and underbanked population in the U.S., it's a lot more in Brazil. You'll see a lot more people without a checking account, a lot more people without 401(K) or any traditional financial products. Over the past few years, the Brazilian government has been actively encouraging, and incentivizing, and supporting these FinTech start-ups. You remember Berkshire already has a pretty successful track record in this space. They got into StoneCo a few days after the IPO. They're up 160% on that investment today. That's pretty good. But Nubank, as the name implies, they're a new kind of bank. They offer things like, in addition to traditional cash management accounts, they have loans, they have life insurance products, they have investment products, they offer mobile payment business. They have about 40 million users, primarily in Brazil. They're just expanding into Mexico and Colombia. A lot of big companies start in Brazil and then expand outward. I think MercadoLibre is another one that is slowly expanding into the Mexico and Colombia markets from their core Brazil and Argentina market. Forty million users, this is part of a bigger investment round. They simultaneously raise another $250 million from other investors, and this is part of a funding round that's been going on since January in the bank. It values the bank at $30 billion. Doing just some quick math, this means Berkshire owns just under 2% of Nubank now.

Moser: Wow.

Frankel: A pretty big company. If this becomes the next PayPal or the next Square, it could be a needle mover for Berkshire. But it looks like you're just trying to get some exposure. I'm pretty sure this was a Ted or Todd investment. I'd be really surprised if this was Buffett himself.

Moser: Yeah. I think you're probably right there, but it feels like even if that's something that they came up with, you feel like this is something that has to at least go through the front office, right?

Frankel: I mean, those two have pretty much freedom to operate. They're potential Buffett said that he didn't realize a stock that they own until reads about it in the paper, because those guys don't really have to clear anything with them. But having said that, whether he knew about it or not, it's one thing I would have to think that Buffett would give his stamp of approval too. We know that he loves the banking industry. He Invested in Wells Fargo a long time ago, and has since exited that investment. Bank of America is behind Apple as the company's biggest stock position. He owns a bunch of banks. He loves the bank and he loves the whole nature of the business. How you're using someone else's money to make money and things like that. The Brazilian banking system is where ours was a few decades ago. It makes sense that he sees more Berkshire in general. It seems more growth opportunities out that way.

Moser: Yeah, I mean, it does make sense from a lot of different perspectives there. I think it was really interesting to note that leadership at Nubank actually sees this is really validation. I mean, that's actually what the CEO of the business of the company said. We said this is a huge validation for what they've been doing. I mean, you have to believe that gives them the confidence that what they're doing is working and the vision that they see for Brazil's and really Latin America's FinTech future, I mean it really does, it seems like Nubank is a company that's really helping to dictate and help form that.

Frankel: Yeah. I mean, Berkshire stamp of approval, it's a pretty big one. Every quarter when their 13-F comes out, the stocks that they bought go up, the stock that they sold go down, [laughs] like the business hasn't changed. It's that they don't do or do not have the Buffett stamp of approval anymore. Remember, Buffett didn't own Bank of America till a few years ago, he had a bunch of warrants. When he cashed in those warrants, then Brian Moynihan had put out a letter saying we're proud to have Warren Buffett as our largest shareholder. Same thing, Nubank just did. It's not just the FinTech start-up that thinks Buffett's stamp for approval was important. Bank of America thinks it's very important. Tim Cook said he's happy to Buffett as an Apple investor, it's a big stamp of approval to have because like it or not, a lot of people invest based on what Buffett does. A lot of people take a [...] from Buffett and think, "Oh, this must be a real business," especially in the case of some of these start-ups.

Moser: It's like Elon Musk tweeting about Bitcoin.

Frankel: Did you go by Bitcoin because Elon Musk tweeted about it?

Moser: I'm going to admit no, I didn't. I'm probably one of the few.

Frankel: Sticking to the Dogecoin, aren't you?

Moser: I feel like we could have an entire show just on that one subject. I'm just going to leave that there. I really do, I love the idea behind this investment. We see so many great opportunities out there in Latin America today, certainly Brazil, because it's such a big market. You noted, I mean, 215 million, some old people, their Nubank with 40 million users today in Brazil, Mexico, and Colombia. Big companies seem like a big market opportunity in front. I think there's good work out very well for Berkshire and regardless who made the investment. I'm wondering if you go ahead and [...] today at least and say, I think that's probably a good move and it sounds like you feel the same way.

Frankel: Yeah, I would agree. I like this investment. I hope to see them being able to put more capital to work. Remember, they've got $140 billion sitting around, so they could make 280 of these.

Moser: A nice problem to have. Back here, on domestic soil here, so to speak, Bank of America CEO Brian Moynihan has noted that consumer spending is 20% higher this year than 2019. I appreciate we're not talking about 2020 simply because that was just an outlier, a bit of an abnormal situation, so really, 2019 is the more sensible comp there. Not terribly surprised to see consumers making such a recovery here, Matt, it did seem like there are some pockets that are still recovering travel being won because really travel is still so much limited. But generally speaking, it sounds like things are heading in the right direction and that's at least based on what Brian Moynihan had seen.

Frankel: Yeah, I mean, I'm glad you brought up the travel thing. He said credit card, debit card, and Zelle payment processing volumes are all up by 20% compared to pre-pandemic 2019 levels. That's after factoring in the travel spend is still 15% lower than it was last year. People aren't spending money on travel as much. I mean, they're starting to now, and a lot of this gets just passed off as people are spending their stimulus checks. This is going to last, but I don't buy that. I mean, I took my kids to Disney World a couple of months ago. It wasn't because we got a stimulus check, it was because we wanted to get out and we were ready eager to go do things.

People have pent-up demand. I want to say a lot of cases in mine especially, there's like a new appreciation for being able to get out and do things. That's something that people took for granted before 2020. You don't really take for granted anymore because, I mean, I hate to scare people, the pandemic could come back and then we can break back in masks, no know going not doing anything. People have a new appreciation for getting out and doing things that are willing to treat themselves a little bit more. As the job market keeps continuing to normalize, wage growth is off the charts, especially at the lower end of the spectrum. You see all these retailers and restaurants have to really compete with each other now for employees?

Moser: Yeah.

Frankel: You are seeing a lot of wage growth, especially that of the industry. It's going to lead to a sustained rise in spending, in my opinion, which could be great for the banking sector. I mean, I know where the financial sector and I'm on the show because I like investing in banks. But having said that, I mean, banks make their money primarily by lending money. Higher spending means more loan demand. These are credit cards, debit and [...] payment volumes. Credit card was the first one he mentioned people borrowing money to do a lot of this stuff. Not necessarily an unhealthy level because we also saw savings rates were off the charts in 2020. It's also used to increase loan demand, which is great for banks. If you're worried that this is going to lead to inflation, which a lot of people are and I am, all this wage growth, all spending growth all it's supply chain disruptions, things like that are going to lead to inflation. That's good for banks to an extent. Inflation means higher interest rates, which means, higher interest margins for banks, and especially Bank of America. Bank of America has a lot of non-interest bearing deposits on its balance sheet.

Moser: That's right.

Frankel: Which means that as its loan interest rates go up, it's not paying anymore for it's deposit base. Here the gap between them really gets wider. I like Wells Fargo. Here is a big beneficiary, but their asset cap is still in place, so they really can't make as many loans as they probably would like to. Who knows how much longer that will be in there --

Moser: I was going to ask you about Wells Fargo. I mean, they've been having one heck of a year. I mean, obviously that was your call at the beginning of the year for financials, stock for folks to keep their eyes on clearly performing very well. To your point regarding that coiled spring, that pent-up demand, not only we're savings rates abnormally high, but we've also seen just a tremendous amount of wealth generated in home equity. I mean, it if you own a home, I have certainly witnessed this and I have to believe that you have to I mean, your home value has gone up and you have more equity in your home now than you probably did before, which gives you the ability in most cases to borrow against that equity if you want to do something, whether that's a home renovation or taking a trip, whatever it may be. I mean, it's just there's been a lot of wealth generated over the past year in one form or another. One thing that Chris Hill and I were talking about earlier today on MarketFoolery, it's something that I had noted back in January from Bank of America's call. I feel like we were seeing some signs of this even back to the beginning of the year because, we heard management on the call they're talking about the velocity of money. I don't know if people know that's actually the real term. I don't know that they literally think about it. I mean, velocity money ultimately just is the rate at which consumers and businesses are collectively spending money in an economy. I mean, that's the rate that money is moving around. I mean, you could see that the velocity of money at the very beginning of 2020 the velocity, that metric fell off a cliff. I mean, so whether you were employed or unemployed in receiving stimulus, I mean, no one was spending money like they normally did. It has led to, like you said, that coiled spring where there was just so much pent-up demand, and across the spectrum. Everybody had a little money to spend. It's really starting to play out now. It's fascinating to watch.

Frankel: I mean, like you said, there is just nothing to spend money on. There were times in mid-2020 where I would have paid an extra $1,000 [...] just to be able to go somewhere.

Moser: I'm sure a lot of people felt that way.

Frankel: You made a really great point that I want to come back to you for a second about increasing home values. A lot of people think that refinancing is drying up. Like in 2020. You refinance, I refinance. I was talking to Anand Chokkavelu on another show, he refinanced twice last year. It's not just about interest rates, you know, interest rates are about where they were last year when I refinance. But if my houses are worth 20% more, I might be motivated to refinance again, to pull some of that cash out. What you are seeing a lot of people do, because that's a much cheaper way to pay for a big purchase than to say put it on a credit card.

Moser: Sure, absolutely. I mean, you can claim that interest in your taxes.

Frankel: I mean, a lot of people are doing what I did in South Carolina, building a pool in their backyard, so it's 150 degrees here in the summer. The best way to do it, the loans through the pool company that I looked at. The pool company, I worked with offers financing and it was at about eight% interest. Meanwhile, I can do a cash-out refinancing my house for 3%, pay for something like that. It's just a much better way to make money or to get access to your money. I think you're going to see a lot of refinancing and that also will lift these banks as spending demand increases. Because the money they're spending comes from somewhere. It can come from credit cards, it can come from savings, or it can come from cheaper cost of our sources of borrowing, where people have gotten very rich, as you mentioned. Home values collectively have risen by more than a trillion dollars this year.

People, they have a lot of wealth in their homes now that they didn't have a year ago. You could see a lot of long tailed spending demand come from that. Don't make the mistake of thinking we're spending their stimulus checks and it's about to be done.

Moser: It shows you the value in being a homeowner. Clearly, we always want to make sure you're spending within your means, but home ownership, it's a big responsibility, but it's certainly also going to open up a lot of doors that might not otherwise open, and just an important thing to keep in mind. Matt, we'd like to talk about REITs on the show, Real Estate Investment Trusts. I know that you love digging into the space for your services with Millionacres, Real Estate Winners, etc. There was a headline here, mall owner Washington Prime, one of the latest REITs to file for Chapter 11 bankruptcy. Just an interesting backstory there with Washington Prime where it originally came from. We wanted to hit this from two angles, I think really because first and foremost, we just talked a little bit about Washington Prime and what really prompted this. Then also, generally speaking with REITs, I mean what were the signs? Or were there signs that this was coming? Are there things that investors can look out for when it comes to real estate investment trust to make sure that they avoid getting involved with the situation like this one.

Frankel: It's a really interesting dynamic with retail real estate specifically right now. This really highlights how much quality matters in the retail space. You can buy an industrial REIT that has maybe some older warehouses. You can get an office REIT that has some older office buildings and they could be OK. With retail, the quality really matters here. Washington Prime has about 100 shopping centers. These are not A malls, they're not the A quality malls. This is not the big destinations. Simply put, the impact of COVID is too great. Do you want to tell them where they came from or should I?

Moser: I wanted to let you do it. You're the guest here. You know more about this back story than I do. Yeah give our listeners an idea where the story came from.

Frankel: Washington Prime came from Simon. They were the spin-off of Simon Property Group in 2014. Simon is the A-malls that I was just talking about, the destination centers.

Moser: A REIT that you like. You've talked about it on the show plenty of times.

Frankel: A REIT that I own, that I would recommend. I'm a big fan of Simon, that's best-in-breed. They probably got rid of these assets because they weren't the best assets and they want them anymore.

Moser: This was just an investment decision on their part.

Frankel: It turns out, a smart one.

Moser: Absolutely.

Frankel: The impact of COVID was just too great on Washington Prime. Simon not only has top quality properties, they also have a top quality balance sheet with a lot of liquidity, a manageable debt load. Because they have such quality assets, have such a great track record, the cost of capital is much lower than its peers, which allowed us to make it through the tough times better. Listen to this statistic. Simon's rental income was down 10% year-over-year in the first quarter because of the COVID pandemic. The first-quarter of 2020 was mostly normal, especially in terms of retailers paying the rent. Things didn't really shut down until late March last year, and Washington Prime was down 13%, pretty similar. Both were down around 10% when it comes to just rental income. 10% of the tenants couldn't pay their rent in the first quarter, whatever. Simon was still very profitable. They are FFO, funds from operations, which is the REIT version of earnings was down 11% pretty much in line with their rental income. Rental income dropped by 10%, earnings drop by 11%. To be expected. Washington Prime, rental income dropped 13%, their earnings dropped 55%, year over year.

The reason is they have higher debt load, higher cost of capital, and it's just not as high quality, and that difference tells the whole story, not really a whole story but there's a lot behind the scenes that goes on with these bankruptcies. Their debt just got overwhelming. Their cash flow in the first quarter was down to $3.33 million versus $10 million in the first quarter of last year. That's a big drop-off. They're not making enough money to cover their obligations. It's just an ugly situation. This was very anticipated for a company that declared bankruptcy and their stocks went down 20% today. That means it was pretty much a question of when not if.

Moser: Already priced in there. Real Estate Investment Trusts have a reputation, a good one for the most part, with investors of high dividend yields. If you're looking for good yield, then REITs are a great place to start your search. Now, if I remember correctly, I think we were talking about EPR Properties at some point, an entertainment company, and it suspended their dividend for a period of time because of the situation. Now, REITs do have a window where they're able to suspend those dividends and still maintain that REITs status. Is that correct?

Frankel: Yes. A REIT is required to pay at least 90% of its taxable income. Taxable income with a REIT is much different than its earnings or FFO. Because of all the tax advantages of real estate, a lot of REITs show negative taxable income, especially during tough times like the pandemic. If a REIT doesn't have any taxable income, it doesn't have to pay out a dividend. That's what you saw with EPR last year. That's what you saw with a few of these retail REITs. Seritage, we've talked about it a few times, they don't pay a dividend. The big reason is because they don't have any taxable income. Tanger was able to suspend its dividend last year because it didn't have taxable income. Empire State Realty Trust the big office REIT, didn't have taxable income and suspended its dividend. REITs can get away with that for as long as they don't have taxable income. Now, I don't know how long I would stay invested if they didn't have taxable income. That's another story. As long as a REIT doesn't have taxable income, it doesn't have to pay a dividend.

Moser: I think at the end of the day here, the bottom line with all this is if you're looking for REITs, maybe Simon Property Group is really what you're looking for. Try not to make it more difficult than it has to be. It's a fascinating space. It never ceases to amaze me. The way the finances work with REITs, it's just a very interesting space, and it is one where I feel you've made a lot of good calls on this show in regard to REITs that are healthy, that are growing, that are far more reliable than others. This just seems to really line up with a lot of the qualities you've been espousing over the past couple of years, and we talked about them.

Frankel: In retail, like I said, more than anything else, quality really matters. There's a bunch I like. We mentioned Simon, realty income is a very high-quality retail REIT. The ticker symbol is O for that one. Even Tanger Factory Outlets have really turned it around, the ticker symbol is SKT there. They've done a great job of writing the shift. They just added a really interesting tidbit about Tanger. The pandemic left them with big spaces to fill. A lot of their biggest tenants went bankrupt. LOFT is one that went bankrupt. All the ones Simon bought, I think, J Crew, Brooks Brothers. They left big spaces. They've done two things. They've been filling them with stores that traditionally didn't have outlets. They just opened the first Dick's Sporting Goods outlet in a Tanger property.

Moser: That requires a lot of space.

Frankel: Which requires a lot of space. That was really the outside-the-box way to do it. They just added WeWork CEO to their board.

Moser: Ouch. The old CEO or new CEO?

Frankel: The new CEO.

Moser: Oh, OK.

Frankel: That actually gives me a clue that they might be trying to turn some of these big vacant spaces into co-work spaces. I don't care who occupies and if they get full from a Tanger investor perspective. I think that could be a win-win for both of them.

Moser: Sure. Well, man, that'll be a fun one to keep an eye on. Matt, before we take off. This week, we got ones to watch. We got a couple of stocks for investors to keep on their radars. What are your ones to watch this week, Matt?

Frankel: Maybe we should call it two to watch since we each pick one.

Moser: Well, yeah, two to watch or ones to watch. That's a good point. Maybe we're going to go with two to watch from now on. [laughs] I like that call. Good one.

Frankel: I'm watching a company called VG Acquisition Corp, no one knows what that is, but it's a SPAC. The ticker symbol is VGAC. They are the ones that's taking 23andme public. The reason I'm watching them this week is because their merger was just approved by their shareholders. It will be finalized this week and 23andme will start trading under its own ticker symbol on Thursday. The ticker symbol will just be ME, M-E. Once the deal is finalized, 23andme is going to get $759 million of cash in the deal.

Moser: Wow.

Frankel: $25 million of that is coming from a personal investment from Richard Branson. They're going to have $900 million in total on their balance sheet, and this is a company that is valued at a little over $3 billion. That's a lot of cash for them to really supercharge their growth. I even bought shares before they announced the deal. I bought more after they announced the deal, and I plan to keep holding this. Healthcare is not usually a sector I really dabble in too much, but I really like what I'm seeing out of this one.

Moser: The danger with some of these SPACs, and given that 23andme has been around for a while, I would assume 23andme is not pre-revenue at this point. I have to believe that is a company generating revenue.

Frankel: No, they're not profitable, but they're definitely pre-revenue.

Moser: Good.

Frankel: Oh, no, they have revenue. They're not pre-revenue. They sell a ton of the home DNA test kits.

Moser: Yeah

Frankel: I've used one, I don't know if you have.

Moser: My wife got me one of those things years ago. I was adopted, and so I don't know anything really about my biological background.

Frankel: You're their target customer base.

Moser: I am, I guess. She got me, I don't think it was 23andme, whatever it was, what was the first iteration when these things started out?

Frankel: Yeah, I know you talked about it.

Moser: I can't remember the name of it now. It was very basic at the time, but I did try it.

Frankel: But now, they're elaborate. They'll tell you if you have a genetic disorder or if you've anything weird going on.

Moser: Yeah.

Frankel: Mine didn't tell me anything that I didn't know. I have a very monotonous family heritage. It told me I was 100% Eastern European Jewish.

Moser: You knew it.

Frankel: I know that my parents didn't lie to me. That's where I come from.

Moser: Oh, man. Another Thursday story here about Adobe. Earnings are out on Thursday, and this is just really more in line with 2021 normalizing a bit from 2020. Businesses are starting to get a little bit more clarity in spending. Obviously, Adobe seems to have a hand in everything that's being done digitally these days, from a content perspective. Last quarter, a very strong quarter revenues, $3.9 billion. That was up 26%, non-GAAP earnings up 38%. Interesting. They're a little competitor to DocuSign. I shouldn't say a little, but their competitor to DocuSign, the document Cloud business. That revenue was up 37% from a year ago as well, and they are guiding now for a full-year revenue close to $15.5 billion non-GAAP earnings, closing in on $11.85. Adobe earnings are out on Thursday. Just to be interested to see how the business is progressing based on the benchmarks they said earlier this year and get their take on how they see the business side of the economy continuing to bounce back. Yeah, we'll be keeping an eye on that one. But I think that's going to do it for us this week, Matt. I do appreciate you as always, taking the time to dig in and share what you've learned with me and all of our listeners.

Frankel: Always. Now everyone knows my genetic heritage.

Moser: Yeah, and I still don't know mine.

Frankel: I'm going to send you a 23andme kit after they go public.

Moser: All right. I'll keep that in mind. Remember, you can always reach out to us on Twitter @MFIndustryFocus. You can drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.