Knowing when it's time to buy stocks has made Warren Buffett, George Soros, and Steven A. Cohen billions of dollars, so tracking their investment activity can be a savvy move. Each of these billionaires is required to file a quarterly 13-F report with the SEC disclosing their activity, and I read through their reports and came away thinking that now is a good time to pick up shares in Store Capital (STOR +0.00%), General Mills (GIS 0.83%), and International Game Technology (NYSE: IGT). Are these stocks right for your portfolio? Read on to find out.
Capital costs are climbing, but this company's dividend is too hard to resist
Buffett's never one to buy a stock simply because it pays a dividend, but he's more than willing to own dividend-paying companies if they're run by proven management teams and he can acquire shares at bargain prices.
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The latest example is Store Capital, a real estate investment trust that owns free-standing buildings and leases them to service companies.
Earlier this year, concerns that rising interest rates would crimp profit and e-commerce would force its tenants out of business sent Store Capital's shares tumbling. That drop provided Buffett's Berkshire Hathaway with a perfect opportunity to buy low.
Berkshire Hathaway portfolio manager Ted Weschler has been kicking Store Capital's tires since 2014, but it wasn't until the sell-off in its shares that Berkshire reached out to Store Capital's management with an offer to acquire nearly 10% of it. Store Capital jumped at the opportunity, selling Berkshire Hathaway 18.6 million shares at $20.25 per share.
Berkshire Hathaway was probably interested in Store Capital because while it isn't immune to the drag on profitability associated with rising costs of capital or the threat of e-commerce, it's arguably better positioned than many of its peers are.
Its senior leadership has been investing in single-tenant real estate for over 35 years, and Store Capital's real estate portfolio includes 1,660 properties run by 360 customers in 48 states. Store Capital's tenants include restaurants, early childhood education, and movie theaters, which are less at risk of losing market share to e-commerce. Less than 20% of its real estate is traditional retail, and many of those retail clients serve markets where shopping in-person still trumps e-commerce, including furniture, crafting, and outdoor sports.
Furthermore, 97% of Store Capital's leases include mandatory reporting of unit financials, allowing Store Capital to make sure its locations are profitable and unlikely to close. Leases are usually long-term, and they include rent escalators, so there's a good amount of clarity into future revenue and cash flow. Profitability is helped by the company's focus on investments that cost them less than replacement cost, and it charges below comparable rents to shore up tenancy.
The end result of Store Capital's strategy is a business model that's inspired Berkshire Hathaway's envy. Perhaps it should inspire your envy too, especially since a 7.4% dividend increase last year means that its shares are yielding a Treasury-beating 4.8%.
Gobbling up food stocks
George Soros may be a cereal fan, but I doubt that's why the famous hedge fund manager bought shares in General Mills (and Kellogg, too) last quarter. Soros' $5 billion stock portfolio now includes 365,493 shares of General Mills and 272,196 shares of Kellogg, worth a combined $40 million.
While these consumer goods stocks yield 3.4% and 3%, respectively, it's more likely that Soros owns them as a hedge against the risk of a stock market sell-off, not because of their dividend yields. Predictable revenue and profit make consumer-goods stocks ideal safe-haven stocks, because they aren't likely to fall as much as the market when the bears come knocking. Over the past five years, General Mills' beta -- a measure of how much a stock moves relative to the S&P 500 -- is only 0.61, which suggests that if the stock market falls, its stock will decline less.
Soros may also have chosen General Mills as a "safe haven" company to buy because of its recent sell-off. When he was buying shares in the second quarter, General Mills stock was down over 12% year to date. The decline was likely due to anemic revenue performance, but cost-cutting has the company growing earnings. Last quarter, earnings per share increased by a healthy 11%.
General Mills' commitment to its investors is also impressive, with management returning $2.7 billion to shareholders through buybacks in dividends last quarter, up from $1.5 billion a year ago.
GIS Revenue (TTM) data by YCharts
Betting on better times
Steven A. Cohen made billions at his S.A.C. Capital before starting Point72 Asset Management to manage his private wealth. Exiting the second quarter, Point72's equity portfolio was worth $14 billion, spread out across 950 positions, including 253 new holdings.
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One of Cohen's biggest recent acquisitions is International Game Technology, a lottery and casino games company. Exiting June, Point72 owned 4.7 million shares in IGT worth $95 million.
The company's got a lot going on that could appeal to Cohen, and perhaps the fact that International Game Technology's shares declined from a peak of $30 last fall to less than $20 in Q2 made this company even more intriguing.
IGT's falling share price provided Cohen with an opportunity to get shares even as management continues to execute on a plan to cut its debt to boost its profitability. Second-quarter revenue declined 5% to $1.22 billion last quarter, but operating income grew 12% to $192 million. About half of the drop in revenue was due to selling DoubleDown for $825 million, a deal that was completed on June 1. Proceeds from the sale reduced IGT's net debt 11% to $7 billion year over year, leading to a $2 million decline in interest expense.
Based on management's forecast, that's only the tip of the iceberg. In July, management made changes to its revolving loans that, when combined with debt payments, is expected to lead to $60 million in annualized interest expense savings. Despite paying down debt, the company's cash improved to $495 million from $294 million in December.
I think that lottery and gambling sales will continue producing a consistent, steady stream of revenue, and with less money being spent on financing debt, that should make this company's shares increasingly attractive. Last quarter, global gambling product revenue rose 5% year over year, and excluding Italy, where revenue declined because of new concessions, global lottery revenue grew 2.6% versus last year.
Overall, IGT could be an intriguing bounce-back stock, but only if management executes on its cost-control program. Nevertheless, buying shares when the price-to-book value has been 1 or lower has ended up paying off in the past, and with a price-to-book valuation of only 1.12, and an improving balance sheet, I think buying shares could be smart, especially since they pay a dividend yield of 4%.
