Berkshire Hathaway CEO Warren Buffett has led his company on a world-beating run that's spanned nearly six decades. When the Oracle of Omaha purchased a controlling stake in the company that would be the foundation of his financial empire, it was trading at just $18 per share.
Jump ahead to today, and a single share of Berkshire's Class A stock is trading at about $563,000. If you invested $1,000 in Berkshire shares on the day that Buffett purchased a controlling stake in the company and held through the years, your position would now be worth nearly $30 million.
Image source: The Motley Fool.
Of course, it's not reasonable to expect that the Oracle of Omaha's company will be able to deliver returns on that level any time within the next century. Berkshire Hathaway currently has a market capitalization of roughly $807 billion and ranks as the world's eighth-largest company. At such an incredible size, delivering relative growth will become much harder.
However, there are smaller stocks in the Berkshire Hathaway portfolio that could be a great fit for investors seeking explosive returns. Within that mold, I think that StoneCo (STNE 1.15%) presents an excellent buying opportunity. Read on to see why you should consider buying this Buffett-backed stock while it's still down about 82% from its high.
StoneCo could be the most explosive company owned by Berkshire
StoneCo's core business revolves around providing payment processing services for small- and medium-sized businesses (SMBs) in Brazil. If a business wants to accept card- or app-based payments, it needs to have point-of-sales hardware and a processing network to run the transaction. StoneCo provides these solutions and takes a cut of each transaction processed through its network.
In addition to its payments business, StoneCo offers retail management software through the Linx platform that it acquired in 2021. The Brazilian fintech also operates a small lending business that provides capital to SMBs -- although this business used to be much larger and is a big part of the reason StoneCo stock trades much lower today.
NASDAQ: STNE
Key Data Points
While the market has broadly shied away from fintech stocks due to macroeconomic pressures, the collapse of StoneCo's lending business played a major role in its valuation pullback. The company had been relying on incorrect data from Brazil's national registry system to determine whether loan applicants were creditworthy.
Along with added stresses related to the coronavirus pandemic, a substantial portion of StoneCo's credit customers went out of business. That meant that the lender wound up with plenty of bad loans in its portfolio and had to temporarily pause its credit business and eat huge losses that tanked its share price.
Although StoneCo has resumed operations for its lending business, the core of the company remains its payment-processing segment. Results for the payments unit have been nothing short of fantastic, and they're powering excellent sales and earnings growth for the company.
StoneCo ended the third quarter with about 3.33 million customers for its payment business, representing an annual increase of roughly 40%. The company also increased the average fee that it garnered on each transaction on its network from 2.21% to 2.49%.
Along with overall sales growth of 25% (thanks to these catalysts in Q3), operating efficiency initiatives helped the company's non-GAAP (adjusted) income -- meaning not in accordance with generally accepted accounting principles -- surge 302% in the period. Starting from a relatively small profitability base partially explains the incredible net income growth, but it would be a mistake to overlook the broader trend here.
A cheaply valued growth stock with huge upside
As with any stock, investing in StoneCo comes with risk. In particular, the potential for unexpected macroeconomic headwinds in the Brazilian market could damp business momentum and depress its valuation.
But StoneCo is valued as if the company were still being hamstrung by problems created by its credit business. That's not the case, and investors have an opportunity to build a position in a stock with huge upside potential while it still trades at very attractive valuation.
STNE PE Ratio (Forward) data by YCharts.
Trading at roughly 13.5 times expected earnings and 2 times expected sales, StoneCo shares are dirt cheap, given the company's recent momentum and forward growth outlook.
The fintech estimates that its adjusted income will increase at a 31% compound annual growth rate (CAGR) from 2024 through 2027. Let's assume that the company is being overly optimistic and only manages to increase earnings at half that CAGR over the stretch. The stock would still be very cheap on an earnings basis at today's prices, and there are good reasons to think StoneCo will be able to hit its targets.
With the stock still down about 82% from its high, StoneCo might very well be the most explosive stock in Berkshire's portfolio today. I bought more shares before the publication of this article and expect that investors who take a buy-and-hold approach to the stock will see excellent returns.
