Meet the Monster Stock That Continues to Crush the Market

It's been a tough past month or so for the market. While some stocks are finally hinting at a rebound effort, most tickers are still well below their February peaks.

That's what makes the performance of one particular stock so compelling. It's impressive in its own right, but even more so because it's overcoming marketwide headwinds to continue making multiyear highs. This strength speaks volumes about investors' confidence in the underlying company's future.

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The stock in question is VeriSign (NASDAQ: VRSN), and to answer the likely question, you might want to take the hint and step into this rising star.

Just not yet.

What's VeriSign?

It's not a household name, but it's a safe bet you or someone living in your household benefits daily from the service it provides.

See, VeriSign is a web-domain registry, meaning anyone who owns or wants to start a website ending with a ".com" or ".net" must register it through this company. VeriSign also administers the naming of websites ending in ".cc" and ".name," in addition to offering related services like domain-name cybersecurity. Without this company, suffice it to say that the web would be a proverbial Wild West simply because two or more entities could each be attempting to use the same domain name.

There's a fee for registering website names, of course. That's what makes this business a good one to be in. Indeed, since VeriSign is the only outfit allowed by ICANN (Internet Corporation for Assigned Names and Numbers) to approve and enforce the naming of ".com" and ".net" websites, it's arguably something of a legal monopoly.

It's not a growth business, though. Last year's top-line growth of 4.3% was in line with long-term norms, and this year's expected revenue growth is about the same. That's what makes the stock's unfettered 35% run-up from its November low so curious and even a little confusing -- it's the sort of move you'd expect to see from far more storied growth names.

If you dig deeper, however, this ticker's sudden and steady rally makes considerably more sense. Credit Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), mostly. Already a major long-term shareholder, Berkshire bought even more shares of relatively small VeriSign (its market cap is a mere $23 billion) near the end of last year, sparking a bullish wave that's yet to quit.

Problem? This strength only adds to the uncertainty already surrounding this name.

The argument for not stepping into a stake

There's no denying Warren Buffett's stock-picking prowess. Given enough time, Berkshire Hathaway consistently outperforms the overall market.

Just because Buffett bought it then, however, doesn't mean it's a great buy for you now.

For perspective, in the wake of the stock's 35% gain since late November, this stock's valuation has soared to 28 times this year's expected per-share earnings of $8.68. Buffett only paid around 23 times this projected profit figure, though, which isn't exactly cheap, but it certainly wasn't a steep price either -- at least by today's standards.

Sure, it's absolutely possible to be so picky about a stock's valuation that you end up not owning what turns into a solid long-term performer.

There are also reasonable limits, though. Even Buffett himself acknowledges that much of his impressive stock-picking history reflects "the purchase of shares in good businesses when market prices were at a large discount from underlying business values." He only wants to pay what he considers a "fair price" for the right company, and with revenue growth that's regularly less than 5%, VeriSign's near-30 earnings multiple is testing the bounds of the fair price that Buffett's generally comfortable paying.

It's not like Buffett's infallible, either. In 2019, he finally conceded that Berkshire "overpaid" for Kraft back in 2015 when it merged with Heinz into Kraft Heinz.

There are also other experts' opposing takes that certainly seem to hold water. As the Weitz Multi-Cap Equity Fund's managers, Wally Weitz and Drew Weitz, explained about the fourth-quarter exit of their VeriSign position, "near-term uncertainty over how and when its principal dot-com registry business can return to volume growth led us to pursue potentially more attractive opportunities."

Data source: StockAnalysis.com.

Weitz's concern is understandable. With over 200 million existing dot-com websites and millions more sites using the .net and .name top-level domain suffixes, the need for more websites is waning. Long-term forecasts suggest this business will grow an average of 5% -- at best -- for the next several years, with most of that being reregistration maintenance revenue. The market's going to be even more crowded then, further negating the need for new websites.

Connect the dots. Not only is this not a high-growth industry, but it will eventually be a business that's only capable of treading water. It's not like VeriSign is paying a dividend in the meantime despite its persistently high profit margins.

Not much upside right now from here

None of this suggests that Buffett and Berkshire Hathaway's lieutenants are flat-out wrong for adding to their stake in VeriSign, let alone holding one in the first place. Again, Berkshire's long-term track record speaks for itself.

Your situation may not be the same as Buffett's, though. For instance, he can afford to wait out any underperformance from this stock, but you might not have the luxury of waiting an indefinite amount of time for forward progress. Even if VeriSign never performs well again, this stock only accounts for about 1% of the value of Berkshire's stock portfolio. Scooping up more shares of this ticker late last year still doesn't make it a high-impact holding for Berkshire.

To this end, if you're looking for a Buffett idea that he's truly committed to in a meaningful way, Apple, Chevron, and Coca-Cola are still some of Berkshire Hathaway's biggest holdings. These are all arguably more promising prospects than VeriSign is, particularly following VeriSign stock's recent market-thumping rally. That big run-up just doesn't feel like it's built to last.

At the very least, wait for a sizable dip to use as an entry point.

Should you invest $1,000 in VeriSign right now?

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James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, Chevron, and VeriSign. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.