When the stock market falls, investors can always find encouragement to stay the course by seeing relatively low portfolio turnover at Warren Buffett's Berkshire Hathaway. Berkshire had held large positions in several stocks for years. Buffett has an unrivaled investing record based on his willingness to pounce when attractive opportunities present themselves and staying focused on the long-term value of the business when Wall Street is panicking.
In the fourth quarter, Berkshire was buying more shares of Constellation Brands (STZ 1.30%), Pool (POOL +0.99%), and Domino's Pizza (DPZ +0.83%). Here's what three Fool.com contributors think about these opportunities.
A classic Buffett value stock
Jeremy Bowman (Constellation Brands): Warren Buffett's Berkshire Hathaway buys and sells stocks every quarter, typically favoring proven winners with reliable business models and evident competitive advantages.
NYSE: STZ
Key Data Points
One of Berkshire's more surprising buys recently was Constellation Brands, the diversified alcohol company best known for selling the Mexican beer brands Corona and Modelo in the U.S. The stock soared a decade ago over the span of a few years after forging a deal with Anheuser-Busch/InBev to acquire the rights to import Corona and Modelo as part of ABI's gaining regulatory permission to merge with SABMiller.
However, since that surge, the stock has been largely flat, and is essentially in the same place it was eight years ago. Constellation shares fell sharply after the company missed estimates in its third-quarter earnings report in January, and it's facing weak consumer spending like most of its peers in the alcohol industry.
Berkshire bought the stock in the fourth quarter, so it was before the recent sell-off, but the stock now looks like a solid value after that pullback, trading at a forward P/E of just 13. The stock also pays a 2.3% dividend yield.
In a number of ways, Constellation looks like a classic Buffett value stock, as shares look cheap and its stable of brands give it an economic moat, as is evidenced by its operating margins of more than 30%. However, the slow growth in the category could be a headwind, especially with tariffs potentially roiling the alcohol market.
Constellation is still delivering steady growth, targeting organic net sales growth of 2% to 5% and a 10% increase in adjusted earnings per share for the year. But investors will have to be patient as macro factors seem to be weighing on the stock. If the company can bounce back from the poor showing in January, the stock could surge from here.
Great business, fair price
Jennifer Saibil (Pool Corp): Berkshire Hathaway's purchase of Pool Corp stock was a bit of a surprise for investors, but it makes a lot of sense. It fulfills the typical Buffett approach to investing, with its leading position in an industry that's going to be around for a long time, and it takes in high profits without having to significantly invest in expanding its business. The company also pays a growing dividend that yields 1.5% at the current price, or above the S&P 500 average.
NASDAQ: POOL
Key Data Points
As its name implies, Pool Corp is a distributor of commercial and residential pool products, servicing professionals, contractors, and retailers. It's the leader in the industry and operates in the U.S. and many global regions.
It's experiencing a slowdown as a real estate-adjacent business. People aren't buying and selling houses in the high mortgage-rate environment, so they're aren't building pools, either. Sales were down 4% in 2024, and operating income was down 17%.
But there are always going to be periods of slowdown in almost any industry, and Pool Corp is managing through the challenging time profitably, keeping its top position and preparing for better times. Management is guiding for sales and earnings per share (EPS) to be roughly flat or slightly up in 2025.
Pool Corp is 22% off its recent highs, along with many other dropping stocks as the market declines. At the current price, it trades at a forward 1-year P/E ratio of 26. That's not incredibly cheap for a stock that's past its high growth stage, but it goes back to what Buffett really looks for in a great stock. Investors sometimes mistakenly believe that he likes cheap stocks, but what he actually looks for is an excellent business at a fair price. Pool Corp fits the bill right now, and long-term investors should take a look at this long-term candidate.
A simple stock with extraordinary return potential
John Ballard (Domino's Pizza): Berkshire Hathaway initially purchased 1.28 million shares of the leading pizza chain in Q3 2024 and increased that stake to 2.38 million shares in Q4. Domino's delivered a high return of 5,300% over the last 15 years, but Buffett and his investing deputies, Todd Combs and Ted Weschler, clearly see more returns ahead.
NASDAQ: DPZ
Key Data Points
These investors don't buy a stock unless they see two things in place: a business with a competitive advantage and a stock trading at a valuation that will lead to an attractive return. Domino's Pizza clearly benefits from a strong brand. During a challenging year for the industry, Domino's grew retail sales by 6% in 2024, driven by strong order-count growth.
Moreover, the company's franchise model keeps capital investment at a minimum level, allowing it to reap the benefits of growing sales, which are earned from royalties and fees charged to each franchisee.
Buffett loves businesses that generate high return on capital employed, because it is a good indicator of a company's ability to deliver profitable growth that fuels shareholder returns. Domino's earned an extraordinarily high return on capital employed of 90% last year, which is even higher than Apple (Berkshire's largest investment).
Domino's has weathered the challenging inflationary environment well over the past few years, with revenue and earnings continuing to march higher. This is impressive performance considering it has more than 21,000 stores in 90 markets worldwide.
The recent dip in the share price has brought Domino's forward earnings multiple to 26, which seems fair for a business that increased earnings at 19% annually over the last decade. Returns will likely be more modest going forward given the company's size, but Domino's Pizza is a well-oiled profit machine that should continue to win for shareholders.
