Warren Buffett Bets Big On StoneCo — Why This Profitable IPO Stock Should Be On Your Radar

Legendary investor Warren Buffett has a big stake in StoneCo (STNE), and this is just one reason investors should put this hot IPO stock on their watch lists. StoneCo stock blasted to a new high Monday morning after the fast-growing, profitable Brazilian payments firm recovered from a big sell-off after going public in the midst of last year’s sharp stock market correction.


Canny CAN SLIM investors are always on the lookout for stocks with institutional support. Here the Brazilian stock scores highly, with famed stock picker Warren Buffett’s Berkshire Hathaway (BRKB) currently holding the second largest stake in the recent IPO stock with 11.8% of its shares. Another good sign is the fact the biggest holder of all is T. Rowe Price Associates, with a huge 24.1% stake. Several Fidelity funds are StoneCo holders as well.

StoneCo is a cloud-based payments processor, akin to Square (SQ) or PayPal (PYPL).

Stone Stock Headwinds Are Now Tailwinds

Two big headwinds have turned into tailwinds for the IPO stock.

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First, the late 2018 correction has turned into a powerful 2019 stock market rally. Growth stocks that were hammered from October to Christmas Eve are leading the current market.

Meanwhile, Brazil’s political and economic climate are improving for the IPO stock. President Jair Bolsonaro, who a runoff election on Oct. 28, took office in January with a pro-market agenda. Last month economy minister Paulo Guedes promised to end years of failed state interventions in Latin America’s largest economy. Bolsonaro aims to enact sweeping free-market reforms.

Hopes for a rebound in Latin America’s largest economy helped lift rival Brazilian payment stock PagSeguro Digital (PAGS). PagSeguro stock, which came public in early 2018, reported strong earnings late last month. MercadoLibre (MELI), an Argentina-based e-commerce giant across much of Latin America, reported much better-than-expected earnings last week. MercadoLibre stock surged 21% for the week.

The iShares MSCI Brazil Capped ETF (EWZ) is up 10.8% so far this year through Friday and 38% since Sept. 13, as Bolsonaro became the front-runner. The EWZ ETF did fall 4.1% last week.

StoneCo Stock Technical Analysis

StoneCo stock rose 6.8% to 33.25  stock market trading, hitting a record high  That blasted above a cup base with a 32.60 buy point after racing higher in recent weeks. But the cup pattern was more than 50% deep.  Bases that are 40% deep or more are less likely to have successful breakouts.

To be fair, StoneCo stock was a new IPO, from Brazil, in a severe stock market correction.

However, investors may want to wait to see if StoneCo stock forms a high handle or consolidates above the current base after such a sharp rally. Such a tight resting period could offer a lower-risk entry point.

StoneCo stock’s relative strength line, which tracks a stock’s performance vs. the S&P 500 index, has taken flight in recent weeks, MarketSmith analysis shows. The RS line is just below record highs along with the IPO stock itself. StoneCo stock has run up sharply in the past few weeks, fueled with above-average trading. Strong volume is a bullish sign for a stock rising in its base.

StoneCo stock went public at 24 a share, then surged 62% to 31.35 in its Oct. 24 debut. Shares hit 32.50 intraday on Oct. 29 — when Warren Buffett bought up that 11% stake in the IPO stock. But then StoneCo stock sank like a stone, losing more than 50% to a 16.14 low on Christmas Eve.

StoneCo Earnings Growth Booming

StoneCo stock is already profitable, and earnings are accelerating. Over the past three quarters StoneCo earnings have been increasing at an average rate of 500%, including a 700% EPS gain in the latest period. The Stock Checkup Tool shows it has impressive fundamentals, which is why it has an IBD Composite Rating of 98. Sales are strong, increasing at a 67% rate over the past three years, and 75% in the latest quarter.

These results have seen StoneCo stock shoot to the summit of the competitive Finance-Credit Card/Payment Processor Group. The group as a whole ranks in 43rd place among the 197 groups covered.

While it serves merchants, StoneCo also sells its solutions to integrated partners such as payment service providers. One selling point is the firm has developed a distribution solution. It has hubs near customers that include an integrated team of sales, service, and operations support staff.

IPO Stock Risks

However the investing in an IPO stock is clearly not without risks. JPMorgan analyst Domingos Falavina rates StoneCo as neutral with a 22 target, and warned it faces competitive threats.

“We see STNE as fairly priced at current levels,” Falavina said in a research note last month, when StoneCo stock was trading lower than it is now. “We see risks to the investment case related to more aggressive pricing strategy from incumbents, particularly given Stone’s significant overlap in the SME market and current cheaper prices vs. incumbents in our view.”

He also said the firm has higher dependence on prepayment revenue compared to incumbents.

However he said there are upside opportunities or the stock too, such as customer stickiness due to software usage; and multiple convergence to peers such as Square stock or PayPal stock, which trade at significant premiums.


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The post Warren Buffett Bets Big On StoneCo — Why This Profitable IPO Stock Should Be On Your Radar appeared first on Investor's Business Daily.

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