Under the leadership of CEO Warren Buffett, Berkshire Hathaway has delivered market-crushing returns for decades. So investors take notice when Berkshire takes a stake in a company. And the same applies when it eliminates a stock from its portfolio.
One stock it recently eliminated in the fourth quarter was the Brazilian fintech StoneCo (STNE 5.01%). The company has gone through some growing pains in recent years, and Berkshire patiently held its stake until the fourth quarter, when it dropped it.
Investors might be wondering if they should follow Berkshire's lead. Let's dive into the company and see if it's a buy, sell, or hold today.
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StoneCo is a fast-growing fintech in an emerging market
StoneCo provides financial services to small and medium-size businesses in Brazil. The fintech offers payment solutions to these companies, including point-of-sale terminals and an e-commerce gateway that enables merchants to accept online and mobile payments.
It also provides tools that help businesses manage everything from inventory to customer relationship management, where it earns subscription fees from merchants who use its platform.
StoneCo's payment-processing business is thriving. Its platform allows merchants to accept payments and resolve fraudulent transactions while providing insights. This platform has often drawn comparisons to Block's Square ecosystem.
In its most recent quarterly earnings report, StoneCo increased its client base and total payment volume by 42% and 20%, respectively, year over year. As a result, its revenue grew 25% while net income more than doubled.
Bad loans weighed on earnings and the stock in recent years
Owning StoneCo stock has been a roller coaster ride. Since bottoming out in 2022, the stock has risen 154%. Despite its rapid rise, StoneCo remains 83% below its all-time high of $95 per share in 2021.
Although the company is expanding quickly, some of that growth has come at the cost of painful losses on bad loans as lending rapidly grew into a sizable portion of its business. In the fourth quarter of 2020, the fintech extended 1.5 billion Brazilian reals ($303.2 million) in loans, representing an 812% increase year over year.
But the company faced substantial headwinds in 2021 when Brazil's economy struggled with high interest rates and a slow recovery from the pandemic, and it paused its credit operations. Compounding the problem was that StoneCo relied on Brazil's national registry database to underwrite loans, and that source contained bad data. As a result, the company provided loans to non-creditworthy individuals and lost hundreds of millions of dollars on its credit portfolio.
Adopt a wait-and-watch approach
Berkshire dropped its stake in the fintech in the fourth quarter after purchasing shares in 2018. We can't know why, but it was one of four stocks (Markel Group, Globe Life, and D.R. Horton were the other three) the conglomerate eliminated from its portfolio during the quarter.
Regardless of Berkshire's exit, investors should continue to monitor StoneCo. The latter has taken steps to improve its credit underwriting by updating its risk models, enhancing its data, and rolling out its credit products on a limited basis to evaluate its new models.
The company has put together five consecutive quarters of growing profits and is on pace to achieve its first full-year profit in two years. Management is also quite optimistic, projecting compound annual growth from 2024 to 2027 of 26% for client deposits, 13% in total payment volumes, and 31% in adjusted net income.
And analysts expect sales to grow around 11% and earnings per share to increase to 42% in 2024. Today, the stock is priced at 11 times its one-year forward earnings, well below its average over the past few years. However, its trailing PE ratio of 26 means the market isn't necessarily undervaluing the stock at the moment. While StoneCo is a rapidly growing company in the emerging Brazilian economy at a reasonable forward valuation, I think it's best to wait and watch for more positive catalysts to appear on the horizon.
