While it's never a good idea to buy a certain stock just because a hedge fund manager or billionaire investor did, it can certainly be an interesting way to get investment ideas from some of the smartest people on Wall Street.
While I don't necessarily agree with all investment moves that major hedge funds have made recently, there are a few that make a lot of sense from a long-term perspective. With that in mind, here's why billionaire investors have been buying Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), AT&T (NYSE:T), and Bank of America (NYSE:BAC).
A billionaire is betting big on another billionaire
One of the most interesting investments made by a billionaire this year is hedge fund manager Bill Ackman's recent investment in massive conglomerate Berkshire Hathaway. Ackman appears quite confident, as he invested about 11% of his fund's assets into Berkshire's stock.
In some ways, this isn't too surprising. After all, Ackman has been a follower of Buffett's investment style for years, so it makes sense that he'd trust Buffett to effectively make investment decisions with his own money. However, it is a big investment, and Ackman often makes large investments when he's trying to influence the company, which doesn't appear to be the case here.
As Ackman explained shortly after the investment was revealed, he feels that Berkshire is trading at a massive discount to its intrinsic value, calling it "one of the least followed and misunderstood mega-cap companies."
Also don't forget that Berkshire is sitting on a ton of cash -- over $122 billion -- which should allow the company to capitalize on any recessions or market crashes going forward.
Lots of hidden value in this telecom?
Hedge fund manager Paul Singer recently revealed a massive $3.2 billion stake in telecom giant AT&T, saying that the stock could potentially reach $60 per share or more. Even after the stock's rise following the announcement, AT&T still trades for less than $40, so this implies considerable upside potential.
To be clear, Singer is an activist shareholder and his investment thesis is based on changes he'd like to see within AT&T. In a letter to the company's board, Singer had some particularly harsh words about the company's acquisition strategy, criticizing the company's failed attempt to buy T-Mobile (NASDAQ: TMUS), its purchase of DirecTV just before the cord-cutting movement started to gain serious momentum, and its recent purchase of Time Warner which Singer is unsure why AT&T needed to own at all.
Singer wants AT&T to improve its focus, make significant operational improvements, stop making big acquisitions, pay down debt, and separate the chairman and CEO roles, among other changes.
There's no way to know if AT&T will listen to any of Singer's advice, but he makes a solid case that there's value to unlock in the telecom giant if it does.
A massive bet on this bank stock
Berkshire Hathaway didn't exactly have an active second quarter in terms of buying stocks, but there was one big purchase that stood out. In fact, Berkshire spent about $1.2 billion in the stock market during the quarter, and about three-fourths of it were spent on Bank of America.
In addition, we also know that Warren Buffett and his team continued to buy Bank of America shares after the quarter ended, as a SEC filing in late July revealed that Berkshire owned about 950 million shares of the bank, a stake of more than 10%. This makes Bank of America Berkshire's largest bank stock position by a wide margin.
It's not difficult to see why Buffett might be so confident in Bank of America. The company has improved tremendously since the end of the financial crisis. If I had told you just a few years ago that Bank of America would generate a 11.6% return on equity (ROE) and a 1.23% return on assets (ROA), you would have called me crazy. But here we are.
Furthermore, Bank of America seems to be outpacing its peers when it comes to growth. The bank's loans and deposits grew by 4% and 6%, respectively, in the second quarter on a year-over-year basis. This was by far the best growth of the large U.S. banks -- the next strongest loan growth was JPMorgan Chase's (NYSE: JPM) 2% increase, for example.
Do your homework
As a final thought, while we know that billionaires are buying these three stocks, it's still important to do your own research before you invest. Just because a stock is appropriate for a certain billionaire investor or hedge fund's portfolio doesn't mean that it will be for you. In other words, although their reasons for buying certainly make sense, be sure a stock is a good fit for your portfolio before buying it.
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Matthew Frankel, CFP owns shares of AT&T, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.