Pool Corp. (POOL +1.47%) isn't a name you'll likely know unless you fall into one of two categories: First, you own a pool. Second, you track the investment decisions of Warren Buffett, CEO of Berkshire Hathaway (BRK.A +1.14%)(BRK.B +1.20%).
It's the second point that makes Pool Corp. so interesting right now, noting that the stock has fallen more than 50% from its high-water mark in 2021. Here's the key to the story that you shouldn't overlook.
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What does Pool Corp. do?
From a big-picture perspective, Pool Corp. is nothing more than a specialty retailer. There are a lot of specialty retailers around, so that's nothing unusual from an investment perspective. What sets the company apart is its niche: selling pool supplies. Pools are interesting.
The single most important thing you have to understand about pools is that they have to be maintained. If you don't properly maintain one, it can very quickly turn into a bug-infested swamp. Nobody wants that in their backyard, even if they no longer use the pool as regularly as they did when it was first installed. This is most likely the big reason Warren Buffett bought the stock.
A key part of Buffett's strategy is buying when a good business is attractively priced. And the huge decline in the stock's price clearly gained the Oracle of Omaha's attention. But why did the stock drop so much? A lot of that came from Wall Street's tendency toward short-term thinking.
During the pandemic, people were trapped at home. Interest rates were low at the time, too. That set up a period in which a lot of homeowners built a pool, creating a demand spike that investors extrapolated too far into the future. When the world learned to live with COVID, pool demand cooled, and investors soured on Pool Corp. stock.
Think long term, not short term
Around a third of the company's top line comes from new pool construction and the renovation of old pools. So construction activity is a big driver of the financial results. And, because of that, its business can be a bit cyclical.
When times are good, people are more willing to build new pools. That said, the pandemic period resulted in an unusual spike, likely drawing forward some future demand.
The negative from this is that Pool Corp. financial results could be a bit weak for a little bit. But go back to the dynamics of owning a pool. Every new pool that's built has to be properly maintained. So the demand spike during the pandemic essentially increased the company's customer base in perpetuity. Note here that roughly two-thirds of the top line on the income statement is driven by pool supplies, which prominently include maintenance products.
NASDAQ: POOL
Key Data Points
This is an inherently growth-focused business over the long term. Sure, over the short term, pool construction trends can lead to earnings volatility, but the basic dynamics of owning a pool don't change. If you don't want an icky green mess in your backyard, you are going to keep buying pool supplies.
So while investors are currently focused on the weak pool construction market, they should be focused on the long-term opportunity offered by the supplies side of the business.
Notably, the company's guidance for 2025 calls for pool construction and renovation sales to be flat to down, while supplies are projected to grow slightly. That is exactly what you would expect to see during a difficult period and speaks to the underlying strength of the business.
Invest like Buffett: Buy and hold
Pool Corp. is not an investment that's going to make you rich overnight. While you can't overlook the nature of pool maintenance, it is not a story that is going to lead to rapid near-term growth.
It does, however, make the company a growth-focused business over the long term. Which brings the story back to Buffett's approach, where a key tenet is to buy and hold to benefit from the long-term growth of a business. If you dip your toes in and buy Pool Corp., make sure you are thinking in decades and not days.
