Despite all the bad press about hedge fund and mutual fund managers who fail to outperform -- or even meet -- their benchmarks, there are still plenty of great investors out there. When those investors make big moves into stocks, it could be a signal that those stocks are quality companies you may want to own as well.
So we asked three of our investing contributors to each highlight a stock that big-name investors are buying today and tell us why they may be a fit for your portfolio. Here's a look at the three they picked: Southwest Airlines (NYSE:LUV), General Motors (NYSE:GM), and Cliffs Natural Resources (NYSE:CLF).
Buffett is all of a sudden in love with airlines
Brian Stoffel (Southwest Airlines): One of Warren Buffett's defining traits is that he's continually reading and learning. That can sometimes lead him to change his investing strategies. And that's what's happening with his investments in airlines.
Back in his 2007 letter to shareholders, he wrote:
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. ... [I]f a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down
But the times are a-changin'. Last quarter, Buffett upped his stake in Southwest Airlines so that Berkshire Hathaway (NYSE:BRK-B) now owns 8% of the company outright. His reasoning behind this move: a combination of industry consolidation, historically low fuel prices, and low valuations.
I'm not an airline investor, but if I were, I'd put my money behind Southwest. It's one of the few airlines I see with anything like a moat around it, as the its brand is noticeably different from the competition, with a reputation for excellent service and transparency. It also only lists flights on its site, which makes it easy to draw people into its ecosystem as well.
In all, I think 13 times forward earnings is a fair price to buy in at, alongside the market's all-time greatest investor.
Why are all these big names buying GM?
John Rosevear (General Motors): Some big-name investors, including Warren Buffett -- but also David Tepper of Appaloosa Management, Robert Bruce of Bruce & Company, and David Einhorn of Greenlight Capital -- either already hold big stakes in General Motors or have been adding to them recently.
Why are all of these smart investors interested in GM, of all companies? And why now?
Here's what I think they see: While companies such as Tesla (NASDAQ:TSLA) and Alphabet's Waymo self-driving-car subsidiary get all the attention, CEO Mary Barra quietly has GM on course to match the tech upstarts -- or even beat them at their own games.
- If electric cars are the future, GM is better positioned than just about anyone to be a big player in that future. Yes, Tesla's Model 3 is exciting, and GM's electric car, the Chevy Bolt, is less exciting. But the Bolt proves that GM (and, as of right now, only GM) has the electric-car tech to go head-to-head with Tesla, or anyone else. GM has more electric vehicles on the way, and with GM's deep expertise in high-performance vehicles, you can bet that some of those new GM EVs will be plenty exciting to own and drive.
- Waymo is the big leader in self-driving tech, the experts say. But many of those same experts will tell you that GM, through its San Francisco-based subsidiary Cruise Automation, is right in the running. And unlike Waymo or anyone else, GM already has a vehicle in production ready to use that self-driving technology: The Bolt was designed from the start with self-driving in mind.
- Ride-hailing and car-sharing will disrupt the traditional model of vehicle ownership, we're told. Again, GM is already a player in both: GM owns 9% of Lyft, which may roll out a big fleet of self-driving Bolts before long, and it owns 100% of Maven, a fast-growing app-based urban car-sharing company.
Long story short: With a century-plus of experience in the challenging art of manufacturing vehicles (something Tesla is still struggling with), and a leading position in the emerging technologies that will transform the auto business, GM is arguably better positioned than any other company in this space.
Meanwhile, right here in the present, GM is generating strong profits on its well-regarded trucks and SUVs, it has minimal long-term debt, and its investors will collect a nice 4.3% dividend while they wait for those future technologies to start generating big profits. That's what those smart investors are seeing.
Beyond the headlines
Tyler Crowe (Cliffs Natural Resources): Ray Dalio and Bridgewater Associates may invoke polarizing emotions from Wall Street folk based on the way the hedge fund is run, but there's no doubting the firm's success over the years. Bridgewater's Pure Alpha II investment fund has averaged 13% annual gains since its inception in 1991. That's a pretty good track record that should make investors at least consider what the company is buying. It's therefore worth investigating the hedge fund's recently stake in Cliffs Natural Resources.
Much of the investment thesis around Cliffs seems to be based on the Trump administration's actions to curb Chinese steel imports that would undoubtedly raise domestic steel prices and, in turn, increase prices for Cliffs' iron ore pellets. What's being glossed over, though, is that Cliffs is in a much better place than it was just a few years ago.
After CEO Lourenco Goncalves took the helm in 2014, he set a path for the company that involved divesting several unprofitable assets to focus on its core business of U.S. iron ore and its Australia mine. He has used the proceeds from those divestments and several other financial tools to reduce the company's overall debt load drastically. In a little more than three years, Cliffs' management has lowered its total debt outstanding by half, to a manageable $1.6 billion, for a net debt-to-EBITDA ratio of 3.1. By the end of 2017, management wants to have that debt load substantially below $1 billion.
Sure, investors following news trends may be intrigued by the possibility of a protectionist steel policy in the U.S., but that all matters little if the company isn't worth an investment. Regardless of whether these policies shake out, Cliffs is in a much better position long term and could make for a solid investment.