Why Buffett’s Berkshire Is Buying Domino’s Pizza, Pool Corp. makes sense

• Warren Buffett’s Berkshire Hathaway bought Domino’s Pizza and Pool Corp. shares last quarter.
• Buffett loves fast food and already owns distribution companies, making the pair a natural fit.
• The “Buffett effect” boosted both companies’ stocks on the news.

Warren Buffett’s Berkshire Hathaway added Domino’s Pizza and Pool Corp. to its stock portfolio last quarter, a regulatory filing revealed Thursday. The pizza chain and the swimming pool specialist seem like a good fit.

The famous investor conglomerate bought nearly 1.3 million shares of Domino’s, a 3.7% stake worth $549 million, at the end of September. Berkshire also bought a 1.1% position in Pool Corp worth $152 million at the end of the quarter.

Domino’s shares rose 8% and Pool Corp. shares rose 6% after the news broke Thursday as “Buffett effect” spurred other investors to buy them.

It’s worth noting that one or both of Buffett’s investment managers, Ted Weschler and Todd Combs, were likely behind the stock picks because of their small size relative to Berkshire’s $266 billion U.S. stock portfolio.

Slice of the pie

As value investors, Buffett and his team specialize in bargain hunting. Domino’s stock has soared more than 40-fold since the start of 2010 and was trading north of $530 in late June — not far from its all-time high of around $560. Still, the price fell to around $400 in mid-July and remained depressed for the rest of last quarter, providing a buying window for Berkshire.

Buffett premium brands because they foster loyalty, allowing companies to raise prices without losing customers to competitors.

The 94-year-old Berkshire boss is a junk food fanatic whose company already owns companies like Dairy Queen and counts Coca-Cola and Kraft Heinz among its biggest stock bets. Domino’s fits well among those kinds of names.

One of Domino’s key strengths is that it controls costs and increases margins by licensing its brand to franchisees and then collection of fees and royalties.

The company also charges them for food, equipment and supplies and takes a portion of their sales to fund advertising campaigns. Company-owned stores generated just 8.4% of the $4.5 billion in revenue last year.

Taking the plunge

Pool Corp. shares fell below $300 in early July, well below the $570-plus peak they reached in November 2021, which may have prompted Berkshire to buy.

The wholesale distributor of swimming pool equipment, parts, supplies and related products generated $5.5 billion in net sales and $523 million in net income last year, down sharply from the year before.

Berkshire owns several construction-related companies, including Clayton Homes and Acme Brick. Buffett and his team are also deeply familiar with the industry, given Berkshire’s ownership of McLane, a wholesale distributor.

The result is that Pool Corp. stuck within Buffett’s “circle of competence,” which he remembers to make sure he only invests in things he understands.

Neither Domino’s nor Pool Corp. classified as cheap on a price-to-earnings basis. But with the broader stock market hovering at all-time highs, they might be the next best thing to a trade.

Both seem to fit the Berkshire mold of modest companies.

Delivering pizzas and pool supplies isn’t glamorous or innovative, but stable businesses are often undervalued by the market. They tend to trade cheaper than flashier, technology-driven companies and are typically less volatile and vulnerable to market disruptions.

The positions are so small that Buffett is unlikely to address them in any public appearances. That leaves it up to investors to decide whether Berkshire bought some gems or picked up a few duds.