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News
December 14, 2024
Warren Buffett buys into PoolCorp stock

Warren Buffett’s company just bought into Pool Corp. Should you?

War r en Buffet t ’s Berkshire Hathaway recently made a splash in the swimming pool industry by adding Pool Corporation (POOL) to its stock portfolio, according to a regulatory filing released on November 14. The conglomerate purchased just over 1 percent of Pool Corp — 404,057 shares — worth approximately $152 million.

While this is a modest investment compared to Berkshire’s sprawling $266 billion U.S. stock portfolio, it comes at a time when Buffett has been actively trimming his stock holdings. Last quarter, the “Oracle of Omaha” halted any stock buybacks and sold down key positions in major companies like Apple and Bank of America.

Buffett’s extensive selling has left financial experts asking why one of the world’s most successful investors is pulling so much money out of the market. One clue might lie in a metric called the “Buffett Indicator,” which compares the total value of the U.S. stock market to the country’s Gross Domestic Product (GDP). The higher the percentage, the more overvalued the market is considered to be.

As of November 2024, the U.S. stock market hit a record high of $58 trillion, pushing the Buffett Indicator to an alltime high of 198 percent. Historically, when this ratio nears 200 percent, Buffett has cautioned that stocks are heavily overvalued, and a market correction could be near.

So why would Buffett jump into Pool Corp now, despite this potentially overheated market?

Buffett is a disciple of Benjamin Graham, his professor at Columbia University and the father of value investing.

This strategy focuses on identifying companies that the market is undervaluing — those that are capable of generating consistent earnings over time. As Buffett once wrote, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Buffett’s goal isn’t necessarily to profit from short-term price fluctuations. Instead, he aims to own businesses that are highly capable of producing earnings and creating long-term value.

So how does Pool Corp align with Buffett’s investment philosophy?

For starters, Pool Corp has a strong track record. One key indicator is its return on equity (ROE), which stands at an impressive 31.3 percent. ROE measures how effectively a company uses its shareholders’ equity to generate profits.

A high ROE indicates that the company is efficiently creating value for its shareholders — something Buffett certainly favors.

In addition, Pool Corp’s debt-toequity ratio is a healthy 0.77, another metric that fits with Buffett’s preference for companies that don’t rely too heavily on debt. Buffett values businesses that can generate growth from shareholders’ equity rather than borrowing money. A low debt-to-equity ratio suggests that Pool Corp is financially stable and has a solid foundation for growth without overleveraging itself.

The company also has a steady profit margin — hovering around 30 percent in recent years, with expectations to maintain this level into the future. A consistent, strong profit margin shows that Pool Corp is efficient at turning revenue into profit, which is another key characteristic of companies that Buffett admires.

Buffett also prefers companies that have stood the test of time, and Pool Corp certainly fits this bill. Since its public debut in 1995, the company has built a solid foundation and developed a deep understanding of its market, which is important to Buffett, who only invests in businesses he fully understands.

Moreover, Pool Corp boasts a competitive advantage, or what Buffett would call a “protective moat.” With 440 sales centers worldwide, the company serves approximately 125,000 wholesale customers and is the go-to supplier for pool equipment. This strong customer base and its longstanding relationships with manufacturers help the company secure favorable purchasing terms, further cementing its dominant position in the market.

While Pool Corp benefited from the surge in pool construction during the pandemic, it also enjoys stable, recurring revenue from ongoing pool maintenance. This reliable income stream makes Pool Corp a strong business in the long term, which would be attractive to Buffett’s long-term, value-focused strategy.

Given Pool Corp’s s t r o n g fundamentals, it might seem like an obvious choice for Buffett. However, there’s one key question: Is the company’s stock undervalued?

Most experts agree that Pool Corp stock is actually overvalued right now. For example, the company’s Price-to-Earnings (P/E) ratio stands at 32.3, which is considered high. This suggests that investors are paying a premium for every dollar of the company’s earnings. While this can be justified if the company continues to grow rapidly, it also means that if growth slows down or fails to meet expectations, the stock might not live up to its high price tag (approximately $373 per share, as of December 6).

Other metrics, such as Price-to-Book (P/B) ratio (10.02) and Price-to-Sales (P/S) ratio (2.71), are also elevated, signaling that POOL is trading at a premium. Furthermore, its dividend yield of just 1.4 percent is relatively low, indicating that the company is reinvesting its profits for growth rather than focusing on delivering high dividends to shareholders.

Despite these high valuation metrics, Buffett clearly considers Pool Corp a worthwhile investment. POOL could be one of those instances where, even at a relatively high price, the long-term growth potential justifies the premium. This makes Buffett’s decision to invest in Pool Corp interesting.

The basis of value investing is ferreting out undervalued stocks. However, Buffett’s approach to investing is different from most.

He values business quality, long-term growth potential, and a strong market position — all of which Pool Corp has in spades. As he famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

For long-term investors with a similar mindset to Buffett, Pool Corp might still be an attractive option, even if it’s not a bargain.

However, for those seeking a quick entry at a lower price, it might be wise to wait for a more favorable valuation.

In the end, Buffett’s investment in Pool Corp suggests that he sees something special in the company. And, as always, when Buffett speaks with his wallet, investors might be wise to listen closely.

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