Warren Buffett’s company just bought into Domino’s Pizza and Pool Corp. Here’s why both bets make sense.

• Warren Buffett’s Berkshire Hathaway bought Domino’s Pizza and Pool Corp. stock last quarter.
• Buffett loves fast food and already owns distribution businesses, making the pair a natural fit.
• The “Buffett Effect” boosted shares of both companies 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 on Thursday. The pizza chain and swimming pool specialist seem like good fits.

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

Domino’s shares jumped 8%, and Pool Corp. shares jumped 6% after the news came out on Thursday as the “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 given their small size relative to Berkshire’s $266 billion US equity portfolio.

Slice of the pie

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

Buffett prizes brands because they foster loyalty, enabling businesses to raise prices without losing customers to rivals.

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

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

The company also charges them for food, equipment, and supplies, and takes a cut 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 dropped under $300 in early July, well below the $570-plus peak they touched in November 2021, which may have prompted Berkshire to buy in.

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, sharp declines from the previous year.

Berkshire owns numerous construction-related businesses, 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. sits firmly within Buffett’s “circle of competence,” which he keeps in mind to ensure that he only invests in things he understands.

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

Both seem to fit the Berkshire mold of unassuming businesses.

Delivering pizzas and pool supplies isn’t glamorous or innovative, but staid companies are often underappreciated by the market. They tend to trade more cheaply than flashier, tech-driven companies and are typically less volatile and vulnerable to market routs.

The positions are so small that Buffett is unlikely to address them in any public appearances. That leaves it to investors to discern whether Berkshire has bought some gems or scooped up a couple of duds.