Buffett’s newest pick for 2024

Warren Buffett recently made news about stocks that Berkshire Hathaway Inc. NYSE: BRK.B sold But it looks like Buffett isn’t sitting out this rally entirely. On November 15, Buffett made two significant purchases in two stocks that the company did not previously own. There were stocks Domino’s Pizza Inc. NYSE: DPZ And Poole Corporation Nasdaq: Pool.

The holdings make up only a small part of the Berkshire portfolio, but as Buffett begins buying homebuilder stocks in 2023, the move has investors wondering what Buffett might see in a company like Poole Corp.

According to its website, Pool Corporation, doing business as POOLCORP, is “the world’s leading wholesale distributor of swimming pool equipment, parts and supplies, and related outdoor living products.” The Company’s business is divided into discretionary and non-discretionary segments. It works with designers and builders to equip new pool construction, which is a discretionary purchase. It also provides maintenance equipment for pool owners, which is a no-brainer.

Is Buffett Buying the Sales Dip?

On November 19, housing starts fell 6.9%, weaker than expected. This was partly due to the two hurricanes that hit the southeastern United States, particularly Florida, a major market for the pool corporation.

Housing permits, on the other hand, rose just 0.5%, suggesting that weak housing starts are being fueled by mortgage rates that are likely to remain high for a long time.

Part of POOLCORP Consumer discretionary stocks The sector, however, is a housing-adjacent play for investors. Looking at the POOL stock chart, investors see a sharp move in 2020 and 2021. That’s linked to homeowners ramping up their home improvement efforts during a global pandemic and the “Great Relocation,” which has split new homeowners into the company’s three main markets. : Florida, Texas, and Arizona.

An active hurricane season in Florida impacted POOLCORP’s quarterly sales, but that may be exactly what Buffett sees as an opportunity in the stock.

Earned as expected

POOLCORP delivered a solid but expected third quarter earnings report in October. Earnings per share (EPS) of $3.26 beat analysts’ expectations for EPS of $3.15. Revenue of $1.43 billion was also ahead of expectations of $1.40 billion.

Double Beat came with some caveats. First, net sales were down 3% year-over-year. The company cited the hurricane and subsequent cleanup in Florida as the main reason. Weather can sometimes be overused to justify poor results. Not so with Poole.

And it’s important to note that, despite the hurricanes, the company saw a modest 1% sales increase in Florida. It was also flat in Arizona, but independent of landscaping and irrigation, pool-related sales were positive in the state. However, sales declines in California (-3%) and Texas (-6%) are further reminders that homeowners are still hesitant about their discretionary spending.

The company is not forecasting much improvement in sales for the current quarter. Still, if you believe this earnings report may reflect a worst-case scenario, POOL stock is starting to look attractive.

Checking off Buffett’s list

Diving into POOLCORP’s balance sheet, you can see a few reasons why the company piqued Buffett’s interest.

• Inventory at the end of the quarter was down 6% year-over-year to $1.2 billion.

• The company reduced debt to $924 million, with $110 million of debt retired over the past 12 months.

• Cash flow from operating activities came in at $489 million in 2024, with operating cash flow of 123% of total revenue.

• The company has conducted $159 million in total share buybacks through 2024 and still has $507 million remaining on its share repurchase rights.

• It is on track to increase its dividend for the 15th year in a row; The dividend has been growing at an average annual rate of over 23% over the past three years.

Should you take the plunge into POOL stock?

POOL stock is trading in a confirmed range after bouncing off its 52-week low in July. And even though the stock didn’t hold the Buffett rally, it’s looking to rally support above $350.

It is true that analysts have a consensus price for POOL stock. However, after the earnings report, several analysts raised their price targets. Comes from the most important Goldman Sachs Group Inc. NYSE: GS, It has a new price target of $415.

It’s clear from his purchase of POOL stock that Buffett’s thinking aligns with Goldman Sachs. However, at first glance, it doesn’t seem to fit the bill as a traditional Buffett buy-and-sell stock. But if you agree that the company’s sales may exceed expectations, this may be a sensible short-term trade.

Before considering a pool, you may want to listen to this.

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