Normally, news that Warren Buffett has added a stock to his portfolio sends the value of that stock rallying. But in the case of Domino's Pizza (DPZ 0.30%), that just hasn't been the case.
In November, investors learned that Berkshire Hathaway had bought 1.3 million shares of the pizza seller. And yet, shares of Domino's have been sliding in recent months. And over the past 12 months, its returns have been flat.
Entering trading this week, the restaurant stock was sitting within 8% of its 52-week low of $396.06. Could it be a steal of a deal right now?
Domino's has excellent fundamentals
It's really not surprising that Buffett might like a stock like Domino's. It has an easy and understandable business model, demand has been fairly steady over the years, and that trend is likely to continue for the foreseeable future.
The business is steadily growing on both the top and bottom lines. While Domino's hasn't released its final numbers for 2024 yet, its guidance calls for 6% top-line growth, 8% growth in its operating income, and net store growth of 800 to 850.
In sum, this is the type of business that Buffett generally likes to invest in. It's profitable and demand for its pizzas remains solid. There don't appear to be any big surprises in store for investors. But there could be one problem: The stock's valuation is a bit high.
Is Domino's Pizza stock too expensive?
While Domino's does have good fundamentals, one big reason investors may be hesitant to follow Buffett's lead is that it trades at 26 times trailing earnings. That's a high multiple given that the company's growth rate is just in the single-digit percentages. Investors are often willing to pay a premium for a fast-growing business, but Domino's is not one. Its earnings multiple is also slightly higher than the S&P 500's average of 25.
For the 2026 to 2028 period, Domino's is projecting slightly faster revenue growth, but the forecast is still in the single-digit percentages. Management expects its global retail sales to rise by 7% annually and its operating income to rise by 8%. That's a good sign that the business is accelerating, but it may not be enough to convince investors that it's a good growth stock to buy and hold.
Should you buy Domino's Pizza stock?
Domino's isn't a stock I'd buy right now. There are plenty of better growth stocks to consider, and while it does offer a dividend, its yield of 1.4% is underwhelming compared to many other high-yielding options out there.
Overall, there isn't a compelling reason to buy Domino's stock today. While it could make for a good long-term investment and be a solid source of recurring income for your portfolio, it's just too expensive to buy right now. Investors would be better off putting the stock on their watch lists and monitoring it to see if its valuation declines.
Even though it's trading near its 52-week low, it wouldn't be surprising for the stock to fall further in the months ahead. The broader market has been red hot for a while now, and a correction could be coming for premium-priced stocks such as Domino's.
