It makes sense that lots of investors watch the stock investments billionaires make. Many of these people made fortunes based on their stock-picking ability, so it seems like a good place to get investment ideas.
Three of the most followed billionaire investors are Berkshire Hathaway CEO Warren Buffett, Pershing Square hedge fund manager Bill Ackman, and Bridgewater Associates hedge fund manager Ray Dalio. While I don't suggest buying any stock simply because a billionaire does, here are three stocks these billionaires own, and some of the reasons they might like them.
Recent Stock Price
A Favorite Stock Of...
Bank of America (BAC 1.99%)
Restaurant Brands International (QSR -1.15%)
Kroger (KR 2.35%)
Buffett's latest banking bet
During the third quarter, Buffett-led Berkshire Hathaway bought a massive stake in Bank of America. The purchase was large enough to make Berkshire into Bank of America's largest shareholder.
To be perfectly clear, this isn't exactly a new investment. In the wake of the financial crisis, Buffett made a savvy investment whereby Berkshire bought $5 billion in Bank of America preferred stock, and also received warrants to buy 700 million shares at $7.14 each (exactly $5 billion altogether). This enabled Buffett to effectively convert the preferred stock into common shares, which he did after Bank of America increased its dividend earlier this year.
Buffett has referred to Berkshire's Bank of America investment as "one we value highly," and it's not hard to see why. Bank of America has been one of the best transformation stories in the post-crisis era. The bank's asset quality is much improved, the company's loan portfolio and deposit base are consistently growing, and profitability is steadily improving. In addition, the bank has become far more efficient thanks to some strategic branch closures and its emphasis on mobile and online banking technologies.
Finally, Bank of America could be a big beneficiary of some key catalysts in the next few years. With an effective tax rate in excess of 30%, corporate tax reform could boost profits by billions. Deregulation of the banking industry could make it easier and more cost-effective to do business. And rising interest rates should expand profit margins significantly, resulting in billions in additional interest income.
An under-the-radar restaurant stock
Hedge fund manager Bill Ackman is known for his well-publicized investments in companies including Automatic Data Processing and Chipotle Mexican Grill. However, one top holding in Ackman's portfolio doesn't receive quite as much attention -- Restaurant Brands International, which operates fast-food restaurants under the Burger King, Popeyes, and Tim Hortons brand names. As of the latest SEC filings, Ackman's Pershing Square owns an 11% stake in the company.
Restaurant Brands International was formed from the merger of Burger King and Tim Hortons, and the stock has soared in the few years since, and in 2017 alone, the company's earnings are up 21% year-over-year. Analysts expect the company to grow earnings at a 19% annualized rate over the next five years, thanks to cost-cutting measures and the additional growth opportunities and synergies provided by the recent acquisition of Popeyes.
In addition to Ackman, it's also worth mentioning that Berkshire Hathaway is also a major shareholder in the company. In fact, Berkshire and 3G Capital effectively control Restaurant Brands International, since they combine to own a majority stake.
This grocery bet may come as a surprise
After Amazon.com announced its intention to acquire Whole Foods Market in June, it seemed investors couldn't sell shares of other grocers fast enough. In fact, shares of Kroger plunged by more than 20% following the announcement, a remarkable drop in such a short amount of time.
So it may come as a surprise that Bridgewater Associates, the hedge fund led by billionaire Ray Dalio, nearly quadrupled its stake in Kroger during the third quarter, while the stock was trading at a huge discount. In fact, the grocer is now Bridgewater's largest non-ETF position in its stock portfolio.
Kroger's recent earnings show that the Amazon-related fears may have been overblown. The company's revenue grew 4.4% year over year in the third quarter, and margin improved by 30 basis points. And bear in mind that this quarter included a substantial amount of time after the Amazon-Whole Foods deal closed and Amazon started slashing prices. With about six times the number of stores as Whole Foods and little direct competition between the two, it's likely that the merger isn't as much of an immediate threat as it may have seemed.
Although it's only been a short time, Bridgewater is likely to be happy with its decision to buy more Kroger shares. Since the end of the third quarter, Kroger is up more than 31% on renewed optimism that it can successfully co-exist with an Amazon-owned competitor.
How to use this information
Although it can be interesting to follow the investment moves billionaires are making, it's never a smart idea to buy or sell any stock just because billionaires did. For one thing, you generally don't know why they bought the stock. And, as is the case with Bridgewater's Kroger investment, it's often the case that the purchases were made at a share price that's no longer available.
The bottom line is that while billionaire stock moves can be good ways to find investment ideas, it's still important to do your own research to determine if a particular stock fits into your investing goals and objectives, and if so, whether it's still a good time to buy.