Regulatory filings revealed that Berkshire Hathaway (BRK.B), which is run by the legendary value investor Warren Buffett, bought new stakes in Domino’s Pizza (DPZ) and Pool Corp (POOL) in Q3. In this article, we’ll discuss whether it is worthwhile to follow the conglomerate into these two stocks.

To begin with, Berkshire hasn’t specified whether the investment decision was made by Buffett himself, or by Ted Weschler and Todd Combs, two of the other investment managers at the company, who run a much smaller portfolio as compared to the “Oracle of Omaha.” 

However, by looking at the relatively small size of the purchases, we can be reasonably sure that the decision was made by one of either “Ted and Todd,” as they are often referred to, and not by Buffett himself - who typically handles much larger stakes for the Berkshire equity portfolio.

Warren Buffett Has Been on a Stock-Selling Spree

Berkshire Hathaway has been on a selling spree, and has net sold (total sells minus total buys) stocks for eight consecutive quarters. Buffett has trimmed stakes in top holdings Apple (AAPL) and Bank of America (BAC), which - coupled with organic cash flows and dividends from invested companies - catapulted the company’s cash pile to a record high of over $325 billion at the end of September.

While the BAC and AAPL stake sales were disclosed previously, there were some surprises in Berkshire’s Q3 13F. For instance, it almost exited its stake in Ulta Beauty (ULTA), after having initiated a position as recently as the previous quarter. The conglomerate also cut its stake in Brazilian digital bank Nu Holdings (NU). 

Meanwhile, even if in all likelihood the decision to buy DPZ and POOL wasn’t made by Buffett, both stocks outperformed on Friday amid widespread selling in broader markets.

DPZ Stock Has Underperformed

DPZ stock is up just about 7.5% this year, and is underperforming the S&P 500 Index ($SPX) by a significant margin. The stock peaked in late 2021, and has since pared gains. Specifically, DPZ has lost around a fifth of its market cap over the last three years. The company is battling stagnant sales amid changes in consumer behavior, which have put a lid on its share price.

Domino’s Pizza Stock Forecast

Of the 29 analysts covering Domino’s Pizza, 17 rate it as a “Strong Buy,” and 2 as a “Moderate Buy.” Nine analysts rate the leading pizza chain as a “Hold,” while 1 rates it as a “Strong Sell.” DPZ’s mean consensus target price of $483.40 is 12.3% higher than Friday’s closing prices.

In terms of valuation, DPZ trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 25x, which - while not cheap on a standalone basis - is below the 29x that the multiple has averaged over the last five years. While we don’t know the price at which Berkshire bought DPZ, the shares plummeted to nearly $400 in July, and the fall would have been an opportunity to scoop up shares for a value investor. 

All of that said, while Domino’s has the kind of brand power and strong cash flows that Buffett admires, I don’t find the stock to be a screaming buy at these prices.

POOL Stock is in the Red This Year

As for POOL, it is a a distributor of swimming pool supplies, and like DPZ, it has also underperformed the markets - if anything, by an even bigger margin. 

Pool shares have lost 10% of their value YTD, and are down 37% over the last three years. Like DPZ, POOL also fell to a multi-month low in July, so it is likely that Berkshire did some bottom fishing in the stock.

The company’s sales have sagged as the pandemic-era swimming pool installation spree has fizzled away. In June, POOL said that it expects new pool units to fall by between 15%-20%, which would come on top of a decline in the previous year, also. During their Q3 earnings call last month, the company said that it now expects the decline in new pool construction to be “closer to 20%" this year. However, thanks to the flurry of new pool installations between 2020 and 2021, POOL’s maintenance-related sales have been strong.

Also on the Q3 earnings call, POOL said that “hesitant” consumer behavior is dampening sales. While the company sees pressure in the entry to mid-level pool buyers, it said that demand for high-end pools is still running strong.

Incidentally, a common thread between Domino’s Pizza and Pool Corp is that both companies were “pandemic-era darlings,” whose sales received a boost from changed consumer behavior during that time. However, as consumer behavior has since mostly reverted to pre-pandemic norms, both of these companies are feeling the heat. 

POOL Stock Forecast

Wall Street analysts are cautious about POOL, and of the 12 analysts covering the stock, only 5 rate it as a “Strong Buy.” Six analysts rate Pool shares as a “Hold,” while 1 says it's a “Moderate Sell.” Its mean target price of $382.40 is just about 6.4% higher than Friday’s closing prices.

POOL stock trades at an NTM PE multiple of 30.4x, which is not cheap by any standards. While the business might fit into Berkshire’s scheme of things, I don’t see the stock turning around anytime soon.