1 Warren Buffett Stock Wall Street Is Sleeping On

When it comes to Brazilian fintech powerhouse StoneCo (NASDAQ:STNE), the word “unpredictable” is a bit of an understatement. This is a company that’s been on a bit of a roller coaster, but boy, if you love a growth story with jaw-dropping numbers, StoneCo’s financials read like a thriller.

Revenues are more than just promising—they shot up by 32.5% in 2020, soared by an eye-watering 85.8% in 2021, and still climbed at a respectable rate of 58.8% in 2022.

And it didn’t stop there: StoneCo posted a 31% uptick in year-over-year revenue growth for Q1 2023 and 28.4% in Q2 2023. Got your attention yet?

Operational Efficiency to Marvel At

But here’s the kicker—StoneCo isn’t just hauling in cash; it’s doing so with a level of efficiency that would make a German manufacturer proud.

How do we know?

Well, just look at the company’s Return on Invested Capital (ROIC)—a whopping 23%.

These aren’t just numbers; they’re signals of a company that’s got its act together. And it’s translating to the bottom line, which is a thing of beauty. For the last 8 quarters in a row, operating income has been positive, and growing nicely.

Over the past 4 quarters alone, operating income has popped from $188 million to $283 million.

Why Isn’t Everyone on Board?

You’d think with Warren Buffett and Berkshire Hathaway throwing their weight behind StoneCo since its 2018 IPO, everyone would be flocking to invest. Yet the market seems oddly lukewarm.

In valuation terms, the stock has a PEG ratio of just 0.18, signaling that it’s undervalued on earnings relative to future growth expectations.

Net income is forecast to grow further this year too. Within two quarter, EBIT or operating income is estimated to eclipse $300 million, which should bolster the balance sheet reserves.

In fact, let’s talk about StoneCo’s balance sheet for a second. Cash reserves took a nosedive from $806 million in 2021 to $286 million by the end of 2022.

But hold your horses; the news isn’t all grim. The company slashed its long-term debt from $1.499 billion in 2021 to a more manageable $1.05 billion in 2022.

This could mean that StoneCo used its cash strategically to reduce debt—a savvy move in an unstable market.

The Strategic Pivot

StoneCo’s go-big-or-go-home attitude in 2021 was a gamble that didn’t fully pay off. The company spread itself too thin, especially in its product and pricing schemes.

Realizing this, management did some soul-searching and shook things up, primarily by retooling its pricing strategies. And it worked—there’s a noticeable increase in their take rate, which has climbed in the past two quarters from 2.06% to 2.39%.

Patience Could Be Your Ally

What’s the bottom line? If the management team keeps their heads on straight and the company continues its recent shifts in strategy, StoneCo could become an investor’s dream. Its alluring PEG ratio and solid ROIC make it an enticing pick in a market where value and growth rarely go hand in hand.

While it may be tempting to jump on the StoneCo bandwagon right now, a bit of restraint might be wise. The company is operating in a complex and competitive field, and the volatility of the stock shows that it’s far from a sure thing. 

With that said, Warren Buffett has been in no rush to offload his shares. At last glance, he held over 10.6 million shares of StoneCo. And while this number is huge relative to most portfolios, the point must be ceded that it only represents 0.04% of his overall Berkshire Hathaway portfolio.

It’s no secret that his favorites like Apple, Bank of America and Coca Cola dominate, representing 51%, 8.51% and 7.59% of his equity portfolio respectively.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.