🔍
🔥 PERFECT FINTECH STOCK? Cathie Wood & Warren Buffett BOTH Hold STNE! - YouTube
Channel: Ticker Symbol: YOU
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Oh boy! Stone, ticker symbol S T N E, just dropped
another 40% in price after reporting earnings. Its
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market cap is now just under 6 billion dollars. I
guess you could say it's share price is dropping
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like a... rock. It was actually pretty
hard to deliver that joke while staying...
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stone-faced. The jokes on this channel
have just hit... rock bottom. Hey, wait!
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So, in this episode, I want to talk about Stone's
current stock price and their earnings report to
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see whether or not the best stock ever just got
even better. Let's start with the stock price.
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One of my favorite sayings in investing
is: "when in doubt, zoom out". Here's
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the entire price history for Stone stone. In
October of 2018, Stone IPOed at $24 per share,
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or around a 9 billion dollar market cap. That
number is important because that's around the
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price Warren Buffett's Berkshire Hathaway
bought 11% of the company for. Berkshire
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spent $340 million to buy 14 million shares of
Stone stock. As of the start of this quarter,
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Berkshire Hathaway still has 10.7 million of those
shares, so he hasn't sold out through the stock's
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60% drop from $92 per share in February to $36
at the start of the quarter. The 3 million or
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so shares he did sell were sold during the first
quarter of this year, for probably north of $70
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bucks, or around 3 times what he bought them for.
This strategy is called: buy low and sell high.
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So, will Warren Buffett sell Stone stock this
quarter, or will he buy it now that it's cheaper
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than what he paid 3 years ago? All kidding aside,
I actually have no idea; I'm right there with you.
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But we can turn to another great investor who
holds Stone stock and posts their trades daily
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instead of quarterly. I'm actually in the middle
of revamping my dashboards and I'll have a pretty
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exciting update on that for you soon. For now,
let's pull up Cathies ARK. Cathie Wood holds Stone
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stock in ARKF, ARK Invest's fund themed around
Fintech Innovation. Here's every purchase of
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Stone shares that Cathie Wood has ever made. She
first bought 233,000 shares of Stone on May 4th,
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2021. On that date, Stone stock closed at
$64 per share. She bought the dip in May,
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July, twice in August, twice in September,
and of course, the huge dip this past week.
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So, that's the situation I've put us in right now:
I'm talking about a Fintech company in an emerging
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market. A company that Warren Buffett still
owns over 7% of that's currently cheaper than
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what he bought it for AND much bigger than when
he bought it. Cathie Wood has also been loading
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up on this stock at MUCH higher prices than it is
today. That's the whole reason I made an episode
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about Stone stock in the first place; I thought it
was a serious opportunity at $36 dollars a share
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and, just in case it needs to be said, I obviously
think the opportunity is twice as good at half the
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price. Speaking of which, let me point out two
things about my episode on Stone stock before
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I get into their earnings. First, here's how I
closed that episode out [quick clip absolutely
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absolutely absolutely]. When I made that episode,
Stone stock was on a serious downtrend and I
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thought I was pretty clear that the trend
could continue. Second, that episode is only
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1 month old. As in, less than 30 trading days. I
actually had to double-check this to make sure.
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I've eaten pizzas older than that! Grad school
was... pretty rough. Listen. If you're measuring
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your time horizon in days instead of years,
you are a stock trader, not an investor. I
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don't mean that as any sort of insult, [yes I
do] that's just not what my channel is about.
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This channel focuses on long-term investing in
advanced technologies that can take years to
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mature and penetrate their target markets IF the
companies building them can make it happen at all.
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It's not meant for the faint of heart or paper
of hand. If that's you, thank you for your time
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and for your Stone shares. [unlike,
unsub, unbell] As for the rest of us...
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Stone reported their quarter 3 earnings on
November 16th and the stock crashed by over 33%.
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So, let's turn to their latest earnings report,
see what they're up to, and update our *long-term*
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investment thesis accordingly. Stone is a
one-stop shop that provides small and medium-sized
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businesses in Brazil the Fintech solutions they
need to move away from cash and join the digital
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economy. They have 2 types of solutions. Their
financial solutions include payment processing
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and point of sale devices, as well as financial
services like business loans and credit lines.
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That makes up about 70% of their total revenue.
The other 30% comes from business software
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solutions, which they're integrating together with
Linx, a financial software company they acquired
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late last year. Let's take a look at their
growth. M S M B stands for Micromerchants, Small,
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and Medium-Sized businesses and T P V stands
for total payment volume. So the total payment
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volume of their small and medium-sized business
is up 70% year over year and it's up almost 2300%
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for micro-merchants. That's over 80% total
payment volume growth year over year.
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If you look at their 2-year compound annual
growth, it's at 61%, which is the highest it's
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been since they could start reporting that number
since they've only been on the market for 3 years.
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If we look at the number of accounts instead of
transaction volume, they've doubled their client
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base over the last year. They added over 27% more
NEW small and medium-sized businesses last quarter
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than they did a quarter ago and over 7 times as
many micro-merchants as this time last year. Said
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another way, their rate of growth is increasing
year over year, not just their growth itself.
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Their financial engagement is also increasing.
Their banking client base has 4 Xed in the last
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year. Their total accounts balance has more than
3 Xed in the last year. In fact, no matter how
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you look at their financial services, like banking
and credit lines, they're all growing by hundreds
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of percentage points year over year, just like
I showed you in my deep dive on the company last
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month. There are a lot of important financial
platform highlights here. Stone is investing
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in a credit platform for S M Bs this quarter.
I'm excited to learn more about this insurance
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solution that's going to collect additional
fees with no underwriting risk. And of course,
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we need to keep an eye out on their partially- and
fully-collateralized loan products since that's
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a big reason their stock has been dropping
in the first place. I'll come back to that.
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When it comes to Fintech companies, one thing we
really care about is keeping customer acquisition
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costs under control because this is one of their
competitive edges over big banks. Big banks have
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big buildings with high costs and run expensive
marketing campaigns that include lots of paper
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mailers. Those costs get divided up among the
customers they acquire. So, it's great to see
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that Stone is keeping their customer acquisition
costs under control; they're up just 1% year over
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year for small and medium-sized businesses and
down by 17% for micro-merchants. Not only that,
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but they're better at monetizing each client
they do acquire. Average revenue per user is
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up 3% for SMBs and almost a whopping 250%
for micro-merchants. More clients times
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more revenue per client is how Stone is achieving
exponential growth on the financial services side.
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Stone's financial software side is looking
pretty good as well, especially considering
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how recent their acquisition of Linx is.
Consolidated software revenue grew by 27%
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compared to their independent software revenues
last year before the acquisition. Stone's point of
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sale and enterprise resource planning software
revenues have almost tripled year over year,
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while Linx's recurring revenues are up about 15%
year over year. So one thing we want to see as
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investors is more improvements on the Linx side
of things as Stone continues to integrate this new
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acquisition into their core business. That's fine;
still early innings for this acquisition. There
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are lots of features that Stone wants to implement
across a wide variety of verticals like beauty,
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pet care, apparel, and gas. This presentation is
full of slides where Stone covers each individual
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aspect of the business, how they impact their
clients, and exactly what their strategy is
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moving forward. I'll leave a link to it in the
description below and I can't recommend it enough.
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Okay, let's dig into their financials. Total
payment volume is up over 50% year over year
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when you exclude their corona-voucher program.
Like the pandemic itself, we want to see this
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part of their business get smaller and smaller
over time and the company to be more and more
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successful without it, so this is great. Total
revenue is up over 50% year over year. One of the
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big reasons I think Warren Buffett and Berkshire
Hathaway invested so aggressively in Stone is
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because they're the biggest merchant acquirer in
Brazil besides the big banks. A merchant acquirer
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is a financial institution that maintains that
merchant's account, enabling them to accept credit
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cards and settles credit transactions on their
behalf. During the first wave of the pandemic,
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when people started to handle more transactions
digitally instead of with cash, 51% of Brazilian
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e-commerce volume went through Stone’s platform.
That's what caused their market share to spike.
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Now, Stone is continuing to gain more and more
market share without their coronavoucher program.
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This is real, stable, non-pandemic
related growth and it's accelerating.
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Okay, before I cover why the stock is dropping
like a rock, comment below or tweet me at ticker
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symbol you with your thoughts on Stone's latest
quarterly report. If you caught my episode on
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Stone, has anything I've said so far meaningfully
changed your investment thesis on the company? I'm
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excited to hear your thoughts. If you haven't
checked out my deep dive on Stone but you like
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what you're seeing so far, I encourage you
to check it out. I cover what the company
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actually does in way more detail. I'll
leave a link to that episode in the top
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right-hand corner of your screen right
now and in the description below as well.
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Okay, so here are the 4 things dropping causing
Stone's stock price to drop like a... stone?
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First up, Stone bought a 5% stake in Banco Inter
so they could bring the bank's customers onto
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their platform. Brazil's economy is struggling
and Banco Inter stock tanked. So, the fair value
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adjustment on these shares went down. In my
understanding, this value adjustment shows up
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as a loss to Stone just like Stone is showing a
loss in our portfolio -- it's unrealized. Stone
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isn't selling Banco Inter's stock low, they're
just updating what it's worth compared to what
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they paid. This is by far the biggest loss on
their income statement. Second, if we look at
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their adjusted free cash flow, we can see their
pre-payment cash needs are still very high.
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This is because Stone's new credit and loan
solutions over-relied on Brazil's new collateral
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registry system, which is something I talked about
in that deep dive. Basically, merchants have to
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put up a certain amount of collateral to get a
business loan or credit line. That collateral is
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registered with one of a few registries in Brazil.
So, this registry isn't something Stone built,
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it's a new collateral system that they have to
integrate with and keep up with as it changes.
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Due to a malfunction in these registries of
receivables, merchants could put up collateral
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with Stone, then go apply somewhere else for
financing and reuse that same collateral, because
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these registries don't talk to each other. So,
one thing Stone is doing to protect themselves is
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putting more cash aside for these non-performing
loans. While this isn't Stone's fault, it
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definitely is their problem and as investors, we
need to see them fix it, either by finding a way
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to rely less on Brazil's faulty credit registry
or cutting their collateralized credit products
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altogether. This is something I'm watching out
for in MercadoLibre's future reports as well
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because Mercado Libre also reported a
high amount of non-performing loans.
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Third, they're aggressively reinvesting
in their future growth through mergers,
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acquisitions, and other investing activities. In
my opinion, this is a good thing because this is
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what high-growth companies do in general and how
Stone is positioning itself to keep claiming more
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and more market share. Still, I definitely hope
these activities work out better than their stake
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in Banco Inter, at least on paper. We have yet to
see how their actual relationship with the bank
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works out in practice. The fourth and final thing
is pretty close to home. Well, my home at least.
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As it turns out, on October 26th, U.S. federal
investigators raided the Florida offices of PAX
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Global Technology, a Chinese provider of
point-of-sale devices used by millions of
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businesses and retailers, including PagSecuro
and Stone. The FBI began investigating PAX
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after a major U.S. payment processor started
asking questions about unusual network packets
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originating from the PAX's payment terminals. PAX
has since issued a statement saying the network
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traffic is due to “the optional geolocation
feature available on PAX terminals,” and “the
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use of dynamic IP addresses, commonly used
for geolocation" just like in a smartphone.
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This FBI raid is what spurred Viceroy research
to take a short position and release a massive
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uh... 1-page short report the next day. You
know what I always say about short reports;
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the better the timing, the worse the report. This
is also what spurred the investigation into Stone
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by Bragar Eagel & Squire. B E S is a stockholder
rights law firm and is investigating potential
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claims against Stone on behalf of stockholders
to make sure they didn't do anything unlawful
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because that would be bad for shareholders. I
actually think that's a pretty fair thing to
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do. Ironically, the news of this investigation
appears to be putting more downward pressure on
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the stock than it's helping Stone's shareholders.
Here are all the investigations that B E S
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would like to remind investors of and
they encourage them to contact the firm.
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In my opinion, the only issues that concern me
is Stone's integration with Brazil's collateral
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registry and the money they're investing in future
growth. Those are the real issues materially
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damaging their balance sheet today and we want
to make sure the benefits outweigh the costs into
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the future. When I say into the future, I mean a
couple of years from now, not a couple of weeks.
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I like what I saw in their most recent earnings
report, I'm excited to see if Warren Buffett buys
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back in, and I'm happily joining Cathie Wood
in buying this dip myself. Whether you buy
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the stock or not, I hope this episode cleared
up what's going on with Stone after their most
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recent earnings call as well as with all the
drama on the side. If it did, and your hands
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aren't made of paper, consider investing in the
like button and subscribing to the channel with
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all notifications turned on. That's a great way
to invest in the channel that invests in you.
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Thanks for watching and until next
time, this is Ticker Symbol You.
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My name is Alex, reminding you that the
best investment you can make... is in you.
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