Markets

Better Buy: Berkshire Hathaway vs. STORE Capital?

To say that the stock market has rebounded sharply since the March lows would be a major understatement. The S&P 500 has soared by 54% since the bottom and recently hit a fresh all-time high. However, not all stocks have completely recovered their 2020 losses just yet.

Two rock-solid stocks that have underperformed the market in 2020 are Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), the conglomerate led by billionaire investor Warren Buffett, and STORE Capital (NYSE: STOR), a real estate investment trust, or REIT, that focuses on single-tenant retail and service industry properties.

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Berkshire Hathaway has underperformed, but...

Many Berkshire Hathaway investors have been frustrated in recent years, and rightfully so. The central thesis of Berkshire's business model is using the money generated by its subsidiaries and investments to buy more subsidiaries and investments, but Berkshire hasn't done much of that lately. In fact, Berkshire hasn't made any major acquisitions in years. Its cash hoard has ballooned to an all-time high of nearly $147 billion. To the disappointment of investors, not only did Warren Buffett and his team not take advantage of the stock market bargains in the first half of the year, but Berkshire was also actually a net seller of stocks.

I'd go so far as to say that the main reason Berkshire is only down 6% in 2020 is because of the performance of its largest stock position, Apple (NASDAQ: AAPL), which has soared by 70% this year. Berkshire's Apple stake is now worth more than $125 billion (about a quarter of Berkshire's entire market cap) and has resulted in a gain of more than $50 billion for Berkshire this year alone. It's fair to say that without this tailwind, Berkshire's stock performance would be much worse.

However, it looks like Buffett might finally be ready to put some of its massive cash hoard to work. The company recently acquired a portfolio of natural gas assets from Dominion and spent more than $2 billion adding to its Bank of America investment (NYSE: BAC). If Berkshire can successfully figure out how to deploy more of the $140 billion or so it has left, it could significantly boost its earning power.

STORE Capital: A beaten-down stock built for steady income

STORE Capital is a real estate investment trust, or REIT, that specializes in single-tenant retail properties occupied by retail and service industry tenants.

STORE's business model is designed to produce steady income and growth at a minimal level of risk. Its tenants sign long-term leases and cover the variable costs of property ownership, like taxes and insurance. Most are in industries that have little risk of disruption from e-commerce competition. In fact, the risk/reward profile is so attractive that STORE Capital is the only REIT in Berkshire Hathaway's massive stock portfolio (Berkshire owns just under 10% of the company).

However, the COVID-19 pandemic was disruptive to STORE Capital. Roughly a third of its properties are occupied by tenants in industries that were severely impacted by closures and stay-at-home orders. These tenants include restaurants (STORE's top property type), day care centers, movie theaters, fitness clubs, and family entertainment centers. By May 2020, STORE's rent collection rate dipped below 70%, mostly due to these five types of tenants.

The recent data is encouraging. STORE recently reported that its July and August rent collection rates are both currently at a much more palatable 86%, and much of the uncollected rent is likely to be deferred to a later date. Plus, 93% of STORE's tenants are now open for business, with movie theaters making up the bulk of those still closed. With a 5.3% dividend yield that's well-covered by the company's earnings and at a big discount to its pre-pandemic price tag, STORE is looking attractive right now.

Two different, but solid, investment choices

To be perfectly clear, I own both of these stocks in my own portfolio and don't anticipate scaling back either position in the foreseeable future. I don't think investors would go wrong putting new money into either stock right now.

These are two very different types of stock investments. Both intend to create maximum long-term value for shareholders, but aim to accomplish this goal in different ways. Income is a major difference, for example. STORE Capital is designed to produce a stable and growing income stream for shareholders. Meanwhile, Berkshire Hathaway hasn't paid a dividend in decades, and shareholders shouldn't expect that to change anytime soon.

Having said all that, I'd have to call STORE Capital the better buy of the two right now. The company's rent collection is coming back strong. This is a stock that quite frankly doesn't deserve to be trading for about 35% less than its pre-pandemic high.

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Matthew Frankel, CFP owns shares of Apple, Bank of America, Berkshire Hathaway (B shares), and STORE Capital. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), and STORE Capital. The Motley Fool recommends Dominion Energy, Inc and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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