Warren Buffett, the CEO of Berkshire Hathaway (BRK.A 0.66%) (BRK.B 0.63%), is one of the richest men in the world. He is also one of the most famous investors to ever work on Wall Street. And this billionaire and his investment team is buying shares of Pool Corp. (POOL -1.35%).
Here's why buying this stock could be a good idea, but only if you do it like Buffett has.
Image source: The Motley Fool.
What does Warren Buffett do?
Buffett is the CEO of a company that's unique. It is a hugely diversified conglomerate, with a collection of businesses that span finance, manufacturing, energy, and many more sectors.
It is hard to fully explain the breadth of the businesses owned by Berkshire Hathaway. That said, the fact that the company's umbrella covers more than 180 owned businesses helps highlight the expansive reach. And, on top of that, the company has a portfolio of individual stocks, too. Pool Corp. is in that stock portfolio.
In many ways, Buffett is really overseeing a portfolio of investments, sort of like a mutual fund. Buying Berkshire Hathaway stock is basically investing alongside the billionaire. Which means that Buffett's approach is extra important to consider.
While Buffett hasn't actually explained it in detail, he has provided a broad outline. He likes to buy well-run companies when they are attractively priced. And then he holds for the long term to benefit from the growth of the businesses over time. That last part is the key, and perhaps the hardest thing to do.
Why buy Pool Corp.?
Pool Corp. is a retailer that sells the supplies needed to build and maintain pools. There are two very different sides to its business. Building pools is somewhat cyclical in nature. Low interest rates and a strong economy tend to result in higher pool construction rates.
High rates and a weak economy tend to lead to less pool construction. So, this part of Pool Corp.'s income stream, roughly a third of its business (including pool renovations), can swing wildly from year to year.
New pool construction got a huge shot in the arm during the pandemic, when people were stuck at home practicing social distancing. As is normal on Wall Street, investors extrapolated the pool construction trend way too far into the future.
That led to a huge share price gain for Pool Corp., despite the fact that a reversion to the mean was highly likely. When that reversion arrived, and pool construction slowed again, the stock plunged.
That's when Buffett and his team stepped in. And they are still adding to their position. Why? Because the other two-thirds or so of the business is tied to selling pool maintenance products, like chemicals. These are not optional purchases if you own a pool. Stop maintaining your pool and it will turn into a disgusting swamp.
So, from a long-term perspective, every new pool that is built increases the target customer base for Pool Corp.'s maintenance products. In other words, there's an inherent growth bias to the business.
That growth bias is likely why Buffett added Pool Corp. to his Berkshire Hathaway portfolio. But the key right now is that he is holding it (technically he's been adding to his position) for the long term. The business isn't going to suddenly turn around for the better, rocketing higher. The pandemic boost was an anomaly.
What investors should expect from Pool Corp. is a slow and steady upward climb. But slow and steady can be a huge wealth builder, assuming you have the fortitude to stick around for the long term.
Do what Buffett does: Think long term
The Pool Corp. story is an interesting one. That Buffett is involved has just brought it to the forefront on Wall Street, which generally focuses on more-exciting things, like artificial intelligence right now. But if you can practice what might be the most important part of Buffett's investment approach -- holding for the long term -- Pool Corp. could be a good option for your portfolio, too.
