Buffett’s “Secret Portfolio” Holds Surprising Treat

Berkshire Hathaway is Warren Buffett’s best known investment vehicle. But another, little-known portfolio sits under his Berkshire investment vehicle and one of the stocks recently added to its portfolio might surprise you.

Almost a quarter of a century ago, Buffett snapped up General Re for its reinsurance operations. Under the General Re umbrella came a subsidiary called New England Asset Management, which now manages about $5.9 billion. Although Buffett doesn’t directly manage the assets, Berkshire Hathaway is the ultimate holder of the securities.

New England Asset Management’s sizeable portfolio means it must disclose its positions via 13F filings. In its latest submission, this little-known portfolio snapped up a company that has been labeled by some as the “Amazon of the pet world”: Chewy.

To Chewy or Not To Chewy

Chewy is a pet food company that sells online. It is largely believed to be immune to the booms and busts of economic cycles – people will continue to feed their pets regardless of rising interest rates or inflation.

Pet spending has risen every year since the turn of the millennium, highlighting that Chewy is perched in a secular growth industry.

While there are stories of abandoned pets that become newsworthy from time to time, the dominant trend among pet owners is to spend on food and health if it helps their pets’ wellbeing.

Where Chewy shines brightest is how it distributes products to pet owners: online. The company is the go-to e-commerce brand for pet owners, featuring over 100k products in its online store.

Think of Chewy as an Amazon for pet goods in this regard: Amazon could sell more cheaply than brick-and-mortar stores because it was able to centralize operations to warehouses outside of main metropolitan areas where rents were cheaper.

So too can Chewy bypass the higher fixed costs suffered by retailers who operate in city centers. That means higher margins and more cash flows to reinvest and expand.

Partnerships Galore

The online formula has been a roaring success. Chewy features over 3,000 brands on its platform and has partnered with pet insurance provider, Trupanion. If your pet needs surgery or simply preventive care, Trupanion can offer it now to Chewy customers.

For both companies it’s a huge win. Trupanion can access Chewy’s vast online distribution reach and Chewy can sell a new, high-margin product to its audience.

So what does it all mean for the share price?

Is Chewy A Buy?

By our estimates, Chewy has upside to almost $50 per share. We ran the numbers on cash flows and discounted them back to present day and arrived at a fair value of $49.40 per share, representing 15.5% upside.

That’s enough potential gain to whet any investor’s appetite but not enough to start wagging your tail enthusiastically. A pullback in line with the market would be the time to pounce as the margin of safety grows and the upside to intrinsic value rises.