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All Contents © 2020The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| October 15, 2019
There's something to be said about following the "smart money's" lead into adventurous, high-potential growth plays. But billionaires also see plenty of potential in stable blue chips like the Dow Jones Industrial Average's components. Indeed, Dow stocks make up considerable portions of some high-profile managers' portfolios.
Billionaire investors often are viewed as more sophisticated, better informed and more likely to enter what would be considered more esoteric trades than the average investor. In some cases, those assumptions are true.
But there's something to be said about safety, as well as the ability of some well-known large-cap stocks to deliver surprisingly outsize returns. Big-time money managers know that – and have put their money where their brains are.
Investors of every ilk would be wise to take the hint and consider following that lead.
Here are seven Dow stocks that make up a large chunk of at least one billionaire investor's holdings. We'll examine how much they hold, as well as which qualities each billionaire investor likely appreciates most about their pick.
Billionaire data, including shares held, worth and % of portfolio, is as of the most recent 13-F filings. Share price and other data as of Oct. 14.
Billionaire investor: Greenbrier Partners
Stake: 400,000 shares worth $79.2 million
Percent of holdings: 13.3%
Apple (AAPL, $235.87) was not only the first company to ever reach $1 trillion in market value, but it arguably mainstreamed the ownership of smartphones. It's also one of Wall Street's most owned and most loved names.
The Apple of today isn't the Apple of five years ago, of course. It's not even the Apple of one year ago. While the iPhone still is technically the company's breadwinner in terms of revenue, that's changing. Competition has closed the gap. Apple's 10.5% smartphone market share for this year's second quarter is down from an 11.9% share in Q2 2018. Samsung and Huawei have proven the most problematic.
CEO Tim Cook has a plan, and the market is generally optimistic that it will work. Apple wants to sell more digital services, including subscription-based access to its own streaming video platform, as well as a virtual arcade. All told, the company hopes to generate $14 billion worth of quarterly services revenue by 2020. In its most recently completed quarter, the division mustered $11.5 billion.
It's still among the most beloved Dow stocks because even against stiff headwinds, the Apple moniker is considered the world's most valuable brand. Its customers are wildly loyal, letting the company sell all sorts of products to them.
Billionaire investor: Platinum Investment Management
Stake: 5,518,881 shares worth $264.2 million
Percent of holdings: 6.2%
It's difficult to get around the idea that Advanced Micro Devices (AMD) simply caught its bigger rival Intel (INTC, $51.64) off guard.
By 2015, Advanced Micro Devices was seemingly on its knees. It was never as big as Intel. But it had been losing ground to its bigger rival for quite some time. Revenue peaked in 2011, then weakened for the next four years. Losses were the norm during that four-year stretch.
CEO Lisa Su apparently had a turnaround plan in mind ever since taking the helm in late 2014, though, beginning with a sweeping overhaul of the organization's hardware. In late 2016, the launch of AMD's then-new Ryzen CPU sent notice to the world that Advanced Micro Devices was not only still around, but could be relevant. The response was outstanding. AMD rattled Intel again in August of this year, launching the world's first (and highly lauded) 7-nanometer CPU two years before Intel expects to release its first 7-nm chip.
The embarrassment appears to have been a wake-up call for Intel, however. The company has ramped up its efforts to design software-based performance leaps. And it's arguable that investors overreacted to the recovery of Advanced Micro Devices, presuming Intel wouldn't be able to respond.
The key reason billionaire investors love Intel: Complacency turned into a liability, but it's Intel. The chipmaker can use its size and deep pockets to buy itself time while firming up its top spot within the processing market.
Billionaire investor: Brave Warrior Advisors
Stake: 2,038,845 shares worth $227.9 million
Percent of holdings: 12.1%
Brave Warrior Advisors isn't the fund with the largest absolute stake in JPMorgan Chase (JPM, $116.45). But it's still betting big on the company, with more than 12% of the fund's asset committed to Wall Street's largest bank by assets.
It hasn't been a particularly fruitful pick of late for Brave Warrior's chief and founder, Glenn Greenberg. The stock's current price near $116 per share is where it was in early 2018; falling interest rates and economic turmoil have weighed JPM down. But the hedge fund's position still is up nicely from its mid-2014 entry price near $59 per share. Greenberg stepped in following a healthy advance, when most other investors were afraid to.
That's because Greenberg, who rarely makes public comments about the fund's positions, is playing a long game. More than two years ago, he explained of positions in JPMorgan, Charles Schwab (SCHW) and Primerica (PRI): "We made a big bet that normal interest rates would not stay at zero. It was that simple. And we didn't know when they would change, but the payoff we felt would be substantial so we have had a lot of financial stocks in our portfolio the last couple years."
The Fed has dialed back interest rates a couple notches this year, but those are potentially secondary stumbles within a much grander uptrend. He added at the time, "Rates could go a lot higher. Inflation could go a lot higher," which makes most financial stocks secularly undervalued.
JPMorgan is a mega-bank, to be sure, but it boasts a lower profile than other financial giants such as Bank of America (BAC) or fellow Dow stock Goldman Sachs (GS), and JPM shares dish out a little less unpredictability.
Billionaire investor: TCI Fund Management
Stake: 16,425,574 shares worth $2.2 billion
Percent of holdings: 11.8%
Investors would be wise to pay attention to the picks that Sir Christopher Hohn makes for his TCI Fund Management. After a strong gain of between 2% and 3% in September, it has gained 29.3% through the first three quarters of the year, according to one of its investors. The S&P 500 gained 18.7% in that time. TCI's average annual gain since 2004 inception is also a market-beating 18%.
The hedge fund has performed so well, in fact, that earlier this year Hohn offered to return more than $1 billion worth of the $24 billion fund's uninvested cash to investors … no strings attached. Most refused, opting to keep their capital in Hohn's hands.
The fund's oversized stake in Microsoft (MSFT, $139.55) is a key part of the reason for that performance.
After a slow start coming out of the 2008 economic collapse, shares finally began to advance in 2013. MSFT has been on an outright tear since 2016, up a little more than 150%. The stock's price has advanced 437% over the past decade, and has returned 584% once you include dividends.
TCI Fund Management took some profits during the second quarter, shedding a little more than 1 million shares. But Microsoft remains Hohn's fourth-largest position at nearly 12% of the fund's total assets.
Microsoft is among the frothier Dow stocks, at 27 times its trailing 12-month income and more than 23 times next year's projected earnings. But investors are willing to pay a premium for the recurring cloud revenue the company is driving.
Billionaire investor: Trian Fund Management
Stake: 36,630,543 shares worth $4.0 billion
Percent of holdings: 41.2%
Investors should be familiar with Trian Fund Management, or at least its chief, Nelson Peltz, if they have owned or closely followed Procter & Gamble (PG, $120.05) shares at any point since early 2017. That's when the activist investor began accumulating the position necessary to effect the kinds of change he deemed necessary to unlock the full potential of the consumer staples giant.
It was the second time in five years Trian had taken aim at P&G. As was the case with his other activist efforts, Peltz was calling for a breakup of the company. His approach this time was to draw out pressure from all shareholders – institutional shareholders in particular – by laying out everything Procter & Gamble had gotten wrong up until that point. Trian even developed a now-shuttered website, revitalizepg.com, as a means of getting all investors on the same page.
P&G has made a few divestitures since Peltz managed to put representation on the board of directors. But truth be told, the company had already planned some asset sales. Perhaps more important is that the enhanced scrutiny seems to have lit a fire under relatively new CEO David Taylor's feet. This year's net margins of 17.5%, versus a figure of 16.8% a year earlier, indicate that the consumer-staples giant is better served by a higher quality and lower quantity of product lines.
Consumers' affinity for big-name brands may be deteriorating in favor of smaller brands and even premium private-label goods. However, Taylor's feel for turning P&G around looks like it could restore most of the Dow stock's former prowess.
Billionaire investor: Third Point
Stake: 6,000,000 shares worth $781.2 million
Percent of holdings: 9.1%
The long-awaited merger of United Technologies (UTX, $135.92) and Raytheon (RTN) looks like it's finally going to happen. The pairing was initially proposed in June, and shareholders of both companies green-lit the deal in mid-October.
The transaction, which will create the market's second-biggest aerospace and defense contractor, is expected to close sometime in the first half of 2020. Although United Technologies was planning to split itself up before the Raytheon deal came into the picture, adding Raytheon's business lines to United Technologies' Collins Aerospace and Pratt & Whitney units makes for a powerful company that can exercise a great deal of leverage.
Several hedge funds saw it coming and played accordingly. As of the end of the second quarter of the year, more hedge funds owned UTX than had owned it in years. Ironically, however, one of the biggest stakeholders was hoping to thwart the deal before it was put to a vote.
That's Dan Loeb, who runs Third Point. In June, shortly after plans for the merger were announced, Loeb wrote to the company's board of directors, "After careful consideration, we have concluded that the proposed combination of United Technologies and Raytheon is ill-conceived and unlikely to create value for UTC shareholders. The contemplated transaction instead complicates the narrative of a more focused aerospace company that was intended to emerge from UTC's breakup."
Loeb can't be entirely disappointed by the outcome. Third Point opened its position in UTX during the second quarter of 2018 and should do no worse than breakeven should it continue to bail out before the deal is consummated. (Third Point shed 7% of its position last quarter). If Loeb sticks with the position, he should enjoy the benefits as the combined companies find plenty of synergies.
Billionaire investor: WindAcre Partnership
Stake: 1,692,000 shares worth $293.6 million
Percent of holdings: 14.2%
It may be an old-school business in a world with much more alluring newcomers such as Square (SQ) and PayPal (PYPL). But credit-card services provider Visa (V, $177.36) is just as relevant as it has ever been, largely because it has made the shift toward more digitally minded offerings. For example, the company offers its cardholders a simple, home-grown solution (Visa Checkout) to making online purchases. It also has finally started to address the fact that Square's self-service model for small merchants is the shape of things to come.
Visa isn't exactly throwing spaghetti on the wall. It has tinkered with cryptocurrencies, but it recently cut bait on the Facebook (FB) crypto project Libra when it became clear it was a nonstarter and too much of a headache. But Visa still operates a dedicated research arm meant to ensure the company has a secure place on the future fintech landscape.
In the meantime, the slow shift toward a cashless society has continued to funnel business in Visa's direction. That's how the company has ranked among the fastest-growing Dow Jones stocks since it joined the industrial average in 2013. More of the same is in the cards, too. Visa is on pace to expand 2019's revenues by more than 11% year-over-year, and analysts expect a similar rate in 2020. They also see earnings growing in step.
The impact of the Visa Research unit can't be understated. Transaction processing is something of a commodity business, but Visa is making a point of not becoming complacent. It's bringing security, mobile and data analytics to the mix, which are must-haves that merchants and middlemen are willing to pay for.