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3 Stocks the World's Best Investors Are Buying Right Now

By Neha Chamaria, Dan Caplinger, and Jason Hall – Sep 3, 2018 at 5:03AM

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Why these billionaire investors are betting on trucking, telecom, and airline stocks.

Following the investment philosophies of the world's best investors is a really smart idea for beginner and seasoned investors alike. That's not to say you replicate their portfolios blindly, but tracking what stocks top investors have been buying lately is not only a good way to find new stock ideas to research but also to back up your own thesis on a stock you may already own.

So we asked three Motley Fool contributors to pick a stock famed investors are currently buying. Here's why Cummins (CMI 2.11%), CenturyLink (LUMN 0.40%), and Southwest Airlines (LUV 0.17%) caught their attention.

Keep on truckin'

Neha Chamaria (Cummins): When the world's largest hedge fund makes a move, it warrants attention regardless of the size of the investment. Ray Dalio's Bridgewater Associates, which manages nearly $150 billion worth of investments, added a new stock to its portfolio during the second quarter: Cummins. The fund now owns shares worth roughly $31.3 million, or 235,261 shares of the engine manufacturer. That's more than the number of shares it owns in Caterpillar, a stock it's been invested in for several quarters now and added to in Q2.

Bridgewater Associates sees value in Cummins, a sentiment that should resonate well with Cummins CEO Tom Linebarger, who believes the stock is "significantly undervalued." Linebarger's optimism is warranted: The trucking markets are strong, Cummins' market share is intact, the company generated record revenue in Q2, and it continues to generate boatloads of cash, enough to support higher dividends and share repurchases while funding immediate growth requirements. Management intends to return 75% operating cash flow to shareholders this fiscal year.

A man touching an idea bulb on a virtual screen.

Image source: Getty Images.

Cummins is, in fact, on pace to deliver a record sales year this fiscal year, backed by strong demand for engines and components from key end markets. With the stock still trading at a forward P/E of less than 10 times, price-to-cash flow of around 12 times, and yielding 3.2%, I wouldn't be surprised if it remains part of Bridgewater Associates' portfolio for a considerable time.

A noted value investor makes a big bet on this high-yield turnaround

Jason Hall (CenturyLink): Unless they make a public statement, it's difficult to say exactly what any investor is buying right now. But we can use quarterly 13F filings to see, in hindsight, what the biggest investors bought and sold. And if there's one fairly recent move that I think investors should take note of, it's Southeastern Asset Management's $1.3 billion investment in CenturyLink late in 2017. 

Led by a noted value investor in CEO and founder Mason Hawkins, its CenturyLink investment is notable because of its size, which makes it by far the biggest individual stock in the investment firm's holdings, as well as the concerns many investors have had that CenturyLink was a dividend trap waiting to snap on investors counting on its high yield. 

Yet since Hawkins' firm made its big investment, CenturyLink  has reported solid cash flows and management has reaffirmed the dividend, sending the stock price soaring. As a matter of fact, the gain in its stock price is probably why Southeastern Asset Management sold off some of its CenturyLink shares in each of the past two quarters, getting it below 15% of its total portfolio value. The fact that they are maintaining such substantial exposure to CenturyLink says a lot about the conviction of their portfolio managers regarding its value.

Like Hawkins, I also think CenturyLink is a solid business selling for a very reasonable price, particularly based on its cash flows. There's still some risk, since it carries a lot of debt and hasn't fully integrated Level 3 Communications. But recent results have allayed many of my concerns, and it looks like the value seekers at Southeastern Asset Management agree. 

Fly higher with this stock

Dan Caplinger (Southwest Airlines): Warren Buffett is one of the world's best investors, and his portfolio moves always garner a lot of attention. One of the most interesting moves that Buffett has made in recent years is to embrace airline stocks, and Southwest Airlines has been one of his favorites. The Oracle of Omaha added another 8.9 million shares to his Southwest holdings during the second quarter of 2018, bringing his total exposure to more than 56.5 million shares worth more than $2.8 billion at current prices.

What's remarkable about Buffett's holdings in Southwest is that historically, he's been extremely critical of the airline business. Once, he said that he had "no ability to forecast the economics" of the airlines industry. Yet now that most of the smaller players among U.S. airlines have consolidated into four huge companies, airline stocks have become a lot more profitable, and Southwest has always had the close-knit feel that many of the privately held companies that have attracted Buffett's eye in the past have shared. Recently, Southwest's business fundamentals have faced challenges from rising fuel prices and a high-profile accident, but with a strong management team focused squarely on the long run and a good reputation among flyers, the airline has a competitive advantage that should appeal to Buffett well into the future.

Dan Caplinger has no position in any of the stocks mentioned. Jason Hall owns shares of CenturyLink. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Cummins. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.

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