The bull market might seem to be losing momentum as it enters its ninth year, with persistent headwinds like trade tensions and interest rates causing wild week-to-week swings. Yet many stocks still trade at reasonable valuations with solid growth prospects. We recently asked three Motley Fool investors to identify top stocks that appeal to the world's top investors, and they cast the spotlight on these prime picks: Apple (NASDAQ:AAPL), Newfield Exploration (NYSE:NFX), and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL).
Buffett's biggest bet
Leo Sun (Apple): Warren Buffett is arguably the greatest investor in the world, and his favorite stock is arguably Apple. Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) initially invested in Apple in 2016, and subsequently made the iPhone maker its top holding.
In May, Buffett disclosed that Berkshire owned 250 million shares of Apple, a 5% stake which is worth about $46 billion. Buffett subsequently told CNBC that he'd "love to own 100%" of Apple. That's a bold statement for an investor who famously shunned tech stocks throughout most of his career. However, Buffett told Berkshire investors at the annual meeting that he "didn't go into Apple because it was a tech stock."
Instead, Buffett praised the robust demand for iPhones as a consumer product, Apple's expanding ecosystem of services, and its ability to boost shareholder value with buybacks or acquisitions. Buffett also told CNBC that concerns about the saturation of the smartphone market are overblown, since Apple sells luxury products. "People want the product," he stated. "They don't want the cheapest product."
iPhone sales are slowing down, but Apple is locking in its users with paid services, like Apple Music, that support the growth of its services unit. Analysts expect higher revenue per customer, steady loyalty rates, and new products to boost Apple's revenue and earnings by 14% and 25%, respectively, this year. Those are impressive growth rates for a stock that trades at just 14 times forward earnings.
A prescient pick of an oil exploration company before prices rose
Chuck Saletta (Newfield Exploration): Ray Dalio's Bridgewater Associates didn't become the biggest hedge fund in the world by accident. It took at least some amount of fortuitous or downright brilliant timing, such as what was displayed in the company's recent investment disclosure. Bridgewater Associates dramatically increased its position in independent oil exploration company Newfield Exploration before oil resumed its ascent above $70 a barrel.
No companies are more exposed to the price of oil than those that focus on exploration and production like Newfield Exploration. For Bridgewater Associates to take such a large increase in its position -- going from around 216,000 shares to over 1,800,000 -- it had to believe that oil prices would resume rising.
At the time of Bridgewater Associate's investment, Newfield Exploration had negative free cash flow -- it was consistently investing more in capital expenditures than it was generating in operating cash flow. That's not a comfortable position for any company to be in over the long haul, but it makes sense for a company that expects a large future payoff from all the investments it is making.
In the case of an oil exploration and production company like Newfield Exploration, it can make a lot of sense to invest in exploration and securing rights when oil prices are cheap. That way, it has its footprint in place and ready to go when prices rebound.
So far this year, Newfield Exploration's shares haven't done all that well, despite oil's general upward trend. It may take some patience for this particular investment of one of the world's greatest investors to pay off, but if oil prices continue to rise, there's good reason to believe its shares will, too.
Know your ABCs
Jordan Wathen (Alphabet): The parent company of Google counts many legendary buy-and-hold investors as shareholders, many of whom have continued to add to their positions even as the share price trudges higher. It's not hard to see why.
Alphabet's Google dominates in online search and display advertising (its bread-and-butter business). Its search engine is the phone book and department store catalog of the 21st century. In video, YouTube benefits from the fact it has the most content, which brings eyeballs, and thus content creators wanting viewers, making it almost impossible to duplicate.
Having two big winners in search and video enables Google to effectively "cross-sell" its products to get even more screen time out of the average user. The Wall Street Journal recently reported [subscription required] that nearly two-thirds of active email users have a Gmail account, making it larger than the next 25 services combined, according to ComScore data.
And while Alphabet may not be obviously cheap at 27 times consensus earnings estimates for 2018, its rapid growth justifies a premium valuation. I don't think it's all that unrealistic to forecast a future in which Alphabet can simply ride the rising tide of its core businesses for double-digit earnings growth for years to come. In such a scenario, all of Alphabet's "other bets," like stakes in driverless car companies or ventures with Chinese retailers are simply extra optionality -- icing on the cake, so to speak.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chuck Saletta has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.