OWhen Warren Buffett buys a stock, investors pay attention. Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)the holding company that Buffett runs, reports a quarterly filing called 13F with the Securities and Exchange Commission detailing his stock holdings, and Berkshire supporters are watching it closely when it comes out.
The newest 13F was released this week. Among other changes, he reported an increase in positions in furniture companies HR (NYSE: HR) and Floors and decorations (NYSE: FND).
HR: The future of high-end furniture
RH has grown from fairly humble beginnings as a catering equipment to a $3.8 billion company with 81 stores and growing. Berkshire first acquired shares in 2019; since then, RH’s stock price has risen nearly 60%.
There are several reasons why Buffett would like this title, even though it may have been chosen by one of his portfolio managers. It has a big moat, which means it’s differentiated enough that it’s hard for another company to encroach on its turf. Visionary CEO Gary Friedman creates a luxury brand, reaching new territories such as well-designed jets, yachts and restaurants. It has a distinct image and pricing to match, and it targets an affluent demographic that seeks premium products and services and has the money to afford them.
RH has rebounded from earlier pandemic declines and sales are up 32% year-over-year in 2021. It is also highly profitable and net profit recently soared as the company moved to charge high prices and increase its margins.
This increase comes despite the same supply chain issues that most retailers face. Going forward, RH faces a tough year-over-year comparison to 2021 and therefore forecasts revenue growth of 5-7% year-over-year. He is also opening new galleries, including his first foray outside the United States. Long term, there are tons of opportunities here.
Finally, RH stock is very cheap and has become cheaper as its stock price has fallen, making now a good time to buy stocks. HR stock is down 44% this year, and the stock is trading at a low valuation of 14 times trailing 12-month earnings. With double-digit revenue growth and triple-digit earnings growth in 2021, along with plenty of opportunities for expansion, the stock looks undervalued.
Floor and decor: modest but growing
Berkshire first took a position in Floor and Decor last quarter, and has now added even more to its new holdings. Floor and Decor is a flooring and hardware supermarket, with large warehouses stocked with all types of flooring and other accessories at great prices. It is similar to a Home deposit or Lowe’s, but with a very specific niche product. It operates 166 stores in 34 states and sees a market of 500 stores. It plans 32 new stores in 2022.
Sales have been strong and future potential is supported by a strong housing market. Here’s what it looked like over the past five years:
Sales continued to increase in the first quarter of 2022, increasing 31% year-over-year. Net profit fell 6% to $71 million as the company grapples with supply chain issues and rising costs, but it is still making a good profit and expects profit per share in 2022 goes from $2.65 in 2021 to $2.75 to $3.00.
Floor and Decor shares are also down 44% this year, and shares are trading at 28 times trailing 12-month earnings. It’s not as cheap as RH, but it’s still cheap for a business growing as fast as Floor and Decor, and it still seems undervalued compared to future opportunity.
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Jennifer Saibil has no position in the stocks mentioned. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares), Home Depot and HR. The Motley Fool recommends Lowe’s and recommends the following options: $200 long calls in January 2023 on Berkshire Hathaway (B shares), $200 short put options in January 2023 on Berkshire Hathaway (B shares) and short calls of $265 in January 2023 on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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