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Warren Buffett’s Berkshire Hathaway has just sold the shares of 2 companies. Here’s why I (humbly) disagree and expect both stocks to go higher from here.

Pabio November 24, 2024

Warren Buffett bought Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) about 60 years ago. At the time, the business was in decline and the purchase seemed like madness. But today, Berkshire Hathaway is worth more than $1 trillion. And it reached this peak thanks to Buffett’s intelligent reinvestment of the company’s cash over the decades.

Given his impressive track record, I regularly study Buffett’s mentality to improve my own investing skills. My desk is littered with highlighted and underlined copies of his annual letters to shareholders as well as out-of-print books on Buffett. Suffice it to say, I’m a student and a fan.

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On November 14, Berkshire Hathaway released its quarterly earnings. Normally, I’m intrigued by investment decisions. But this time the company sold Ulta Beauty (NASDAQ:ULTA) And Floor and decoration (NYSE:FND). And I think these moves are mistakes.

I have great respect for Warren Buffett And Berkshire Hathawayso I don’t say this flippantly. But I think shares of Ulta Beauty and Floor & Decor are poised to outperform the S&P500 over the next five years. And that’s why I humbly disagree with Berkshire’s sales decisions.

With more than 1,400 locations already, Ulta Beauty is a large cosmetics retail chain, which suggests that opportunities for future growth are limited. This is reflected in management’s guidance for 2024, which implies a slight decline in net sales, with same-store sales declining slightly. This lackluster growth encourages investors to depreciate the stock.

Growth is certainly important. But there are other ways to achieve strong stock performance, and Ulta Beauty has what it takes. For starters, the company is highly profitable, even in periods of slow business. It expects an operating margin close to 13% this year and intends to maintain it above 12% in the long term.

With its profits, Ulta Beauty is buying back shares – it just authorized a $3 billion buyback plan in October. And reducing the number of shares can increase its earnings per share (EPS) at a much faster rate than its revenue. In fact, management expects double-digit EPS growth from there.

Double-digit EPS growth may be enough to boost Ulta Beauty stock at a faster rate than the S&P 500. Additionally, I think there is little risk with this investment. Cosmetic spending is extremely resilient. And the stock is trading at its third-lowest price-to-earnings (P/E) on record, mitigating downside risk if earnings continue to climb.

ULTA PE Ratio Chart — ULTA PE ratio data by Y Charts

Floor & Decor stock fell 30% from its all-time high. And long story short, the home improvement market is contracting, which is impacting the company’s sales. Its same-store sales are expected to fall about 8% year-over-year in 2024. But I don’t think that’s an issue to worry about right now. As the chart below shows, sales growth largely reflects existing home sales in the United States.

U.S. Existing Home Sales Chart — U.S. Existing Home Sales data by Y Charts

I’m not an eternal optimist here. On the contrary, if home sales were to pick up and Floor & Decor sales remained difficult, this would be a time for serious concern. But I think the fears are premature. The real estate market is cyclical and should eventually recover, boosting Floor & Decor when that happens.

With only 241 locations at the end of the third quarter of 2024, Floor & Decor has ample room for expansion. In fact, management is targeting 500 sites in the long term. In 2024, it will open 30 new stores in total, 20 of which had already opened before the end of the third quarter. And in 2025, it plans to open 25 more — a slower pace than usual, given the weak real estate market.

During this lean period, Floor & Decor management maintains its profitability by reducing expenses where it can. True, its profit margin in the first three quarters of 2024 is only 4.7% – it has reached 9% in recent years. But these profits mean that the company continues to strengthen financially, preparing it for the recovery of the real estate market.

I’m not sure when the real estate market will recover, and neither is Floor & Decor’s management. But given the usual ebbs and flows of the real estate market, I expect a recovery over the next five years. And when that happens, I would expect sales to rebound and profit margins to reach more historic levels. And that will almost certainly result in a strong stock performance.

Buffett’s Berkshire Hathaway sold Ulta Beauty and Floor & Decor stock and the holding company is known for making excellent investment decisions. But if you want to outperform the S&P 500 over the next five years, I think Ulta Beauty and Floor & Decor offer low-risk chances to do so. For this reason, I humbly disagree with the decision to sell and believe both stocks are good to buy today.

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Jon Quast has positions in the field of flooring and decoration. The Motley Fool posts and recommends Berkshire Hathaway and Ulta Beauty. The Motley Fool has a disclosure policy.

Warren Buffett’s Berkshire Hathaway has just sold the shares of 2 companies. Here’s why I (humbly) disagree and expect both stocks to go higher from here. was originally published by The Motley Fool