Billionaire investors know a thing or two about picking stocks. That's why we Fools like to scan our favorite investors' holdings every couple of months to see what they have been buying and selling.
With that in mind, we asked a team of investors to highlight an income stock that a famous billionaire investor has purchased recently. Here's why they called out Pfizer (NYSE:PFE), HCP (NYSE:HCP), and STORE Capital (NYSE:STOR).
A top income opportunity
George Budwell (Pfizer): The $240 billion-ish hedge fund Bridgewater Associates -- that's the one run by billionaire investor Raymond Dalio -- has held a modest position in pharma giant Pfizer since the third quarter of 2013. And while other billionaire investors like David Tepper saw fit to dump their shares in this high-yield pharma stock in the second quarter of this year, Dalio and his ginormous hedge fund actually added another 121,108 shares during the three-month period, according to whalewisdom.com.
Why the dueling sentiment? Although it's impossible to know why either of these super-investors buy or sell any stocks in general, Pfizer is a stock that is currently losing its appeal to growth-oriented investors, but still remains an outstanding passive income opportunity. The long and short of it is that Pfizer simply hasn't brought enough new growth products to market to offset the loss of exclusivity for key medicines like Lyrica, which will soon be under threat from generic competitors. And the company's high-dollar buyout of Medivation for its prostate cancer drug Xtandi last year has so far failed to change this outlook.
On the flip side, Pfizer does offer one of the highest yields at 3.61% across the entire pharmaceutical industry -- along with a stellar cash position of $14.4 billion that suggests that its better-than-average payout is safe for the time being.
All told, Pfizer still has a lot of work to do to convince growth investors that better days are ahead. But its top-notch yield should be appealing to any investor looking for reliable sources of passive income.
Billionaire Ken Griffin loves this 5% yield in the healthcare sector
Sean Williams (HCP): While billionaire money managers are just as fallible as retail investors like you and me, their stock holdings are nonetheless worth keeping a close eye on considering how successful they've been with their investments. One high-yield billionaire stock that has my attention is real estate investment trust (REIT) HCP, Inc., which is currently being held by Ken Griffin's Citadel Advisors. Citadel, which had more than $152 billion in assets under management as of March 2017, had almost $90 million invested in HCP as of the end of the second quarter.
Why the love for HCP? To begin with, the company's focus on healthcare-based real estate properties should set it up for long-term success. According to the U.S. Census Bureau, the elderly population is expected to explode from 48 million to 88 million between 2015 and 2050. Since elderly folks usually require more medical attention and care than younger adults, there's the expectation that hospitals, life-science needs, and senior housing demand will only increase. That's a long-term positive for HCP and its rental-pricing power.
However, unlike other healthcare property managers, HCP's focus on senior housing generally revolves around independent facilities rather than assisted-living facilities. Competition and supply in assisted living have surged in recent years, putting downside pressure on margins in that portion of the industry. Comparatively, HCP's margins have remained strong because of its focus on independent living facilities where supply issues have been minimal.
We also can't overlook the benefits of HCP being a REIT. In exchange for returning 90% or more of its profits as a dividend, investors in HCP walk away with an exceptionally high yield of 5.1% at present. This dividend appears highly sustainable given its recent efforts to push out its average debt maturity dates, as well as its focus on higher margin operations. In this instance, what's good for Ken Griffin might very well be perfect for all income investors.
This high-yield stock has Warren Buffett's seal of approval.
A REIT hand-picked by Buffett & Co.
Brian Feroldi (Store Capital Corp.): Warren Buffett minted himself (and his long-term shareholders) a fortune by buying strong businesses that were temporarily out of favor. With the markets near all-time highs, finding bargains hasn't been easy recently. However, I think Buffett's team picked up shares of an absolute gem called STORE Capital earlier this year for a terrific price.
What does STORE Capital do? This company is organized as a REIT, and it largely manages a portfolio of single-tenant retail properties.
The key word from that last paragraph is "retail." If you've been paying attention to the markets at all, you are likely aware that the retail industry is in a state of crisis right now. Scores of retailers are reporting weak results, closing stores, or in some cases, declaring bankruptcy. When adding in the ever-present threat posed by Amazon.com, it's understandable why the sector is under pressure.
Despite these headwinds, Buffett's team decided to take a 10% position in STORE capital in June. Why? A few reasons:
- STORE focuses on leasing to retailers in the services businesses (think movie theaters, auto shops, health clubs, and restaurants). These companies are not directly threatened by e-commerce growth.
- Tenants initially sign multiyear leases, which helps to minimize turnover.
- The leases are structured so that the tenants pay for all property specific variable costs (taxes, insurance, maintenance, etc.).
- Most tenants are required to submit quarterly financial reports to STORE. This enables STORE to identify weak tenants quickly.
When combined, these factors helped STORE produce an occupancy rate of 99.5% last quarter. That's crazy good, especially since most investors consider the retail sector to be too risky to touch right now.
While STORE's stock has rebounded sharply from where Buffett & Co. got in, shares still offer investors a 5% yield today. If you're after income, I'd suggest giving STORE Capital a closer look.
Brian Feroldi owns shares of Amazon. George Budwell owns shares of Pfizer. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.