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A Look at 2 of Berkshire Hathaway's Smaller Investments

- By Rupert Hargreaves

Whenever Warren Buffett (Trades, Portfolio) decides to add a stock to his portfolio at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), it always receives plenty of attention, particularly those stocks where he has a multi-billion dollar position.


However, these smaller positions in his portfolio, those that are worth only several tens of millions of dollars or a couple of hundred millions of dollars, received less attention.

This is probably because these positions are unlikely to have been initiated by Buffett himself.

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Several years ago, the Oracle of Omaha decided to dedicate management of part of his portfolio to his investing lieutenants Todd Combs and Ted Weschler. These positions are interesting and no less important than the main holdings such as Apple, Coca-Cola and American Express because it is much more likely these companies offer undiscovered value.

Berkshire's smaller holdings

According to Berkshire's most recent 13F filing with the SEC (Dec. 31, 2018), two new small holdings were required for the portfolio during the fourth quarter of last year. These were Suncor Energy (SU) and StoneCo (STNE). Together, Berkshire invested $550 million in these two positions, buying 10.8 million shares in Suncor and 14.2 million shares in StoneCo.

StoneCo is the smaller of these two positions, and it accounts for 0.14% of Berkshire's $183 billion equity portfolio.

StoneCo bills itself as a "provider of financial technology solutions" that provides "end-to-end, cloud-based technology platform to conduct electronic commerce, across in-store, online and mobile channels." This is not a very traditional Buffett investment.

According to my research, for 2018 as a whole, the company generated revenues of only 728 million Brazilian real and produced an operating loss of 107 million real. The company is a Brazilian business listed in New York. Even though the conglomerate's stake in this Brazilian fintech group accounts for only 0.1% of its portfolio, the group actually owns more than 11% of StoneCo and took part in the company's recent initial public offering -- another trait that marks this as something Buffett himself would not be buying.

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The company reportedly services over 230,000 digital and brick-and-mortar stores in its home market and its revenues are expanding exponentially. They have increased by more than 320% in the last three years.

This company has much in common with PayPal. Although it is still early days for the business, StoneCo claims to have 5.5% of the electronic payments market in Brazil, and at the speed it is growing, it will only be a matter of time before this is one of the biggest payment processors in the region.

It is notable that towards the end of last year, Berkshire also acquired a substantial stake in India's Paytm, the largest mobile payment service in the country. This move has been attributed to Todd Combs who, before he joined Berkshire, managed financial services-focused hedge fund. It is more than likely that he is behind StoneCo as well. If either of these businesses can replicate the same success that PayPal has had over the past decade, then Berkshire could be in for a big payday as the world becomes increasingly digital, although for the time being losses looks set to continue.

Buying back into a previous investment

With regard to Suncor, this isn't the first time Berkshire has had a position in this oil sands-focused energy business.

The group first started buying Suncor in the second quarter of 2013 and had acquired 22.4 million shares by the fourth quarter of 2014. Then the price of oil collapsed, and after several quarters of inactivity, Berkshire boosted its holdings by a third to 30 million shares at an average price of approximately $27. Between the second quarter of 2013 and the third quarter of 2015, Berkshire was buying between $27 and $43 per share.

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Then, in the third quarter of 2016, Buffett and his team dumped the whole lot. Considering that the stock was trading below $30 per share for the majority of the third quarter of 2016, I do not think it is unreasonable to assume that Berkshire made a loss on its original Suncor investment (excluding dividends).

That Buffett's business has decided to re-enter Suncor is fascinating. The team at Berkshire must have noticed a substantial change in the company's outlook during the 24 months it did not hold a position.

Disclosure: The author owns shares in Berkshire Hathaway.

This article first appeared on GuruFocus.