Warren Buffett isn't known for following the trends when it comes to investing. For example, last year, as indexes were soaring, the billionaire chairman of Berkshire Hathaway was a net seller of stocks and built up a record level of cash -- the cash level now stands at $347 billion. As investors showed their exuberance, especially for technology and growth stocks, Buffett remained on the sidelines.
This isn't exactly a surprise though. Buffett doesn't invest heavily in tech stocks. He favors looking for undervalued players in other industries and getting in on them before the rest of the market discovers their potential. He then sticks with these investments for the long term, and this strategy has been a winning one for Berkshire Hathaway, helping it deliver a compounded annual gain of nearly 20% over five decades.
The increase in S&P 500 valuations also surely represented a red flag for Buffett due to his focus on value. With the S&P 500 Shiller CAPE ratio reaching a level it's only attained twice before, stocks were looking expensive -- and that means bargain hunter Buffett wasn't doing much shopping.
Buffett's caution last year might have shielded his portfolio from the turbulence of the first few months of the year when the three major benchmarks slid on concern about the economic impact of President Donald Trump's import tariff plan. All of this suggests that Buffett's moves may help us determine future trends and make better investments in the present. And now, once again and with one particular stock, Buffett sure looks like he knows something is going to happen.
Image source: The Motley Fool.
Buffett's latest moves
As previously mentioned, Buffett hasn't been a big buyer of stocks in recent times and actually has been a net seller for 10 straight quarters. He's even cut his positions in some of his favorites, such as Apple and Bank of America over the past year. But they still remain top holdings, in the No. 1 and No. 4 spots, respectively.
Stocks last year looked expensive, with the S&P 500 Shiller CAPE ratio surpassing 37 for the third time in its history.
S&P 500 Shiller CAPE Ratio data by YCharts.
Explaining his investment intentions, Buffett wrote in a recent shareholder letter: "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."
Buffett's been buying shares of this market leader
Against this backdrop, without a huge number of tempting opportunities, Buffett still has made some compelling moves. One was the purchase of Pool Corp. (POOL 2.38%), the world's top wholesale distributor of swimming pool supplies, in the third quarter. He followed up on this by increasing his position by 145% in Q1 of this year to 1,464,000 shares. This is a small position for Buffett at just under 0.2% of his portfolio, but his opening of the position and then increasing it suggests he believes something is going to happen. And knowing Buffett, he's expecting gains ahead.
Pool reached a low in valuation and price around the time of Buffett's purchase last year, then climbed, but it's since retreated again.
Revenue has dipped at Pool in recent times due to lower discretionary spending and difficult weather in the big markets of Texas and Florida. In the latest quarter, net sales slipped 4%, and without including the impact of a tax benefit, earnings per diluted share fell 29%.
It's important to note that Pool's business may be hurt by seasonal factors such as weather. As an industry that depends on discretionary spending, it's sensitive to economic shifts. So, this sort of slowdown isn't alarming.
NASDAQ: POOL
Key Data Points
One of Buffett's favorite things: A strong moat
It's clear that Buffett took advantage of the dip last year and this year to buy shares of Pool at a good price, and he aims to benefit by holding onto the stock for the long term as the economic environment improves and Pool's revenue picks up. The company has something that Buffett likes, and that's a strong moat, or competitive advantage. It includes many elements, from the company's solid distribution network to its relationships with commercial clients that oversee the strict maintenance of hotel or gym pools. Plus, Pool sells its own products and water-testing software.
All of this adds up to recurrent revenue for Pool -- and this extensive portfolio of products and services would be very difficult for a new rival to build out.
So, there's reason to be optimistic that weakness in Pool's sales today is a temporary situation, and over time, this market giant will deliver growth to investors who had the patience to hold on. Warren Buffett may be one of those investors, seeing the opportunity now as this stock is in the doldrums and understanding that something positive is on the horizon.
