Fresh out the kitchen

Let’s start with a new stock addition. The notable one was a $557m notional buy of Domino’s Pizza (NYSE:DPZ), equating to almost 1.28m shares.

I can understand why this might have ticked a lot of boxes for Buffett and his team over at Berkshire. Buffett’s famous for liking consumer staple businesses that have a strong track record over a long time. Domino’s was founded in 1960 by two brothers in Michigan. It has expanded over the decades, but essentially is still tied to making a simple product (pizza) well.

Buffett also likes value stocks. Even though I wouldn’t say Domino’s is very undervalued at the moment, it has lagged the broader market performance. Over the past year, the stock’s up 15%, but not close to even 52-week highs. This compares to the 30% gain from the S&P 500 that’s made fresh highs on a regular basis this year.

However, I’m not that interested in following suit and purchasing now. I don’t see anything that exciting going on at the company. Q3 results showed revenue growth of 5.1% versus the same period last year, with net income down 0.5%. This doesn’t strike me as a company that’s pushing ahead, or one that’s seeing an influx of customer demand.

Not as pretty

On the flipside, Berkshire Hathaway reduced it’s holdings in Ulta Beauty (NASDAQ:ULTA) almost completely. This comes after buying over $260m worth of the stock just the quarter before.

The stock’s down 10% over the past year, but from my rough calculations Buffett hasn’t lost money on this based on when he likely bought and sold.

It’s unusual for the company to trade in and out of a holding over such a short period, so maybe there’s something we aren’t aware of right now. However, based on the information I have, I don’t agree with the move.

It’s true that Ulta has been under pressure recently with tougher competition in the beauty space. However, the latest Q2 results showed several positive signs. The Q3 results are due out in a couple of weeks so I’m surprised Berkshire and Buffett didn’t wait for this update before making a more informed decision.

Certainly as a long-term investor, I’d be waiting for more information before making this call. Admittedly, I don’t own the stock, so ultimately can’t fault Buffett as he’s the one with skin in the game.

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In and out quickly

The stock Buffett sold was Ulta Beauty (NASDAQ: ULTA). It’s an American make-up and skincare chain that sells products from a vast range of brands. Filings show he sold 665,903 shares, equating to 96.5% of his holding.

This is an unusual move for Buffett. The reason I say this is that he only bought Ulta a few months ago. And in the past, he’s stressed the importance of long-term investing and said his favourite holding period’s ‘forever’. So I’m not sure what’s happened here.

Maybe his team sees risks around rising levels of competition in the beauty space? This could potentially slow the company’s growth in the years ahead.

Personally, I think this stock still looks quite attractive. For starters, it sells products that are in high demand in today’s social media-focused world. According to Grand View Research, the global cosmetics market’s set to grow by over 6% a year between now and 2030.

Secondly, it’s very profitable. Last financial year (ended 31 January 2024), return on capital was over 40%. Third, the valuation seems very reasonable. Currently, the forward-looking price-to-earnings (P/E) ratio is just 16.

Given these positives, I haven’t ruled out investing in this company.

Grabbing a slice of Domino’s

Looking at his recent buys, one that stands out to me is Domino’s Pizza (NYSE: DPZ), the well-known restaruant chain that operates a franchising model. In Q3, Buffett bought 1.27m shares. That equates to around $550m worth of stock at today’s share price.

This is an interesting move, in my view. There’s certainly a lot to like about Domino’s from an investment perspective. Not only is it very profitable (return on capital last year was 73%) thanks to its huge brand but it also has a long track record when it comes to generating wealth for investors.

However, the stock’s quite expensive. Currently, the P/E ratio here’s about 26. That earnings multiple doesn’t leave much room for error. If earnings miss estimates, the stock could take a tumble.

I’m wondering if Buffett would have been better off grabbing a slice of the UK-listed version of Domino’s Pizza (LSE: DOM)? It holds the master franchise agreement to own, operate, and franchise Domino’s stores in the UK and the Republic of Ireland, and it has been a great investment in the long run.

This stock’s a fair bit cheaper than its US-listed peer. Currently, the P/E ratio is only 16.9, a far more attractive valuation.

Of course, this company’s markets are much smaller than those of its US-listed peer. So there’s less growth potential. And disposable income here in the UK is far lower than in America today. So it may not perform as well as the US-listed stock in the years ahead.

Still, the valuation gap’s significant. So, I think the stock is worth considering today.

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A new position

In a recent regulatory filing, it was revealed that Berkshire Hathaway purchased about 690,000 shares of Ulta Beauty in the second quarter, valued at approximately $266m as of 30 June. This new position immediately caught the market’s attention, with the shares surging 14% in after-hours trading following the announcement.

The company operates as a speciality beauty retailer in the US, offering a wide range of cosmetics, fragrances, skincare, haircare and salon services. With over 1,300 stores across 50 states, it has established itself as a one-stop shop for beauty enthusiasts, carrying both prestige and mass-market brands.

This is one of the firm’s key strengths with a broad product assortment across various price points. The diverse offering allows the company to cater to a wide range of consumers, from price-conscious shoppers to those seeking high-end luxury names. This strategy has helped it become a preferred destination for prestige beauty products, perhaps giving it a competitive edge in a very crowded market.

Solid numbers

Overall, recent financial performance has been solid, with the company reporting $11.3bn in revenue for the trailing 12 months. Despite facing challenges from the rapid expansion of competitors like LVMH‘s Sephora both as standalones and in Kohl’s stores, the business has maintained a pretty strong market position.

I suspect the company’s valuation may have also attracted Buffett’s attention. The shares currently trade at a price-to-earnings (P/E) ratio of around 16 times, which is lower than its historical average. This relatively attractive level, combined with the company’s growing market position and potential, aligns well with Buffett’s value investing philosophy.

Looking ahead, management has set out several initiatives to drive growth. The company is focusing on expanding its assortment, enhancing its digital capabilities, and strengthening its loyalty programme. These efforts are expected to contribute to an acceleration in comparable sales growth in the second half of 2024.

Risks ahead

However, it’s important to note that the company faces some challenges. Management recently updated its fiscal 2024 forecast, lowering its comparable sales growth projection to 2%-3% from the previous 4%-5%. Additionally, increased promotional activity has been putting serious pressure on merchandise margins.

Despite these challenges, I’d suggest Buffett’s investment signals confidence in its long-term prospects. As always, Buffett’s approach is to invest in businesses with strong fundamentals and competitive advantages, rather than trying to time short-term market movements.

For investors considering following Buffett’s lead, I think it’s worth noting that the shares have seen some significant volatility in recent years. They reached an all-time high of $574.76 in 2023 before pulling back to current levels around $365. This volatility underscores the importance of adopting a long-term perspective when investing, much like Buffett himself.

So, while Apple remains Berkshire Hathaway’s most valuable holding, I’d say Buffett’s new purchase deserves attention. When the world’s most successful investor makes a move, it’s certainly worth taking notice, so I’ll be adding the company to my watchlist for now.

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