It's never a good idea to blindly mimic the actions of billionaire investors, but it can be useful to keep track of what the world's best investors are buying and selling. Best Buy (BBY -0.36%), PG&E (PCG 2.29%), and Sirius XM Holdings (SIRI 4.43%) are three stocks that have recently been popular with big-time investors. Here's what you need to know.
A bet on retail
Tim Green (Best Buy): Consumer electronics retailer Best Buy has successfully turned itself around over the past six years. By slashing unnecessary costs, lowering prices, investing in customer service, and building out its online business, Best Buy has positioned itself to effectively compete in the age of e-commerce.
Best Buy stock has soared more than 440% since the beginning of 2013, and one billionaire investor is betting that the retailer will continue to deliver gains. David Einhorn's Greenlight Capital bought shares of Best Buy in the second quarter as part of a broader bet on retail. The stock has been beaten down since, but that only makes it a better deal.
Best Buy expects to report adjusted earnings per share of about $5.14 this year. That puts the price-to-earnings ratio at just 12.5. Earnings growth will probably slow down in the coming years, partly because Best Buy will lap the corporate tax cut that became effective this year. But services can continue to power the bottom line higher. Best Buy acquired GreatCall, the company behind the easy-to-use Jitterbug phone, earlier this year, gaining a source of recurring subscription revenue that adds to its existing services offerings.
Best Buy stock probably won't quintuple again over the next six years. But with a cheap valuation, it can continue to deliver solid gains.
Even the best investors make mistakes
Tyler Crowe (PG&E): This is a cautionary tale for investors who like to follow billionaires and hedge fund managers into positions. In recent quarters, a murderers' row of billionaire hedge fund managers including Baupost Group's Seth Klarman, Appaloosa Management's David Tepper, and Third Point's Dan Loeb all bought stakes in California utility PG&E.
One of the reasons that the stock became so popular with hedge funds was a recent law passed in California that would allow the utility to increase rates for customers to help pay for liabilities related to wildfires in 2017 that were largely a result of PG&E equipment failures. The law more or less assured that those excess payments could be absorbed, that the company would be able to avoid bankruptcy, and that the stock was undervalued as a result. Its stock was, after all, down 33% after those 2017 fires.
Those big purchases of PG&E could come back and bite hard, though, as it was recently discovered that there was an equipment failure at the point of origin for the recent devastating Camp Fire. The company has said that it had already fully drawn its $3.3 billion in credit lines and that its insurance coverage of $1.4 billion won't likely be enough to cover all payments related to this fire should it be found liable. As a result, the stock is down 45% in the past week, and there are once again serious concerns about PG&E's solvency.
PG&E is an example of why it may not necessarily be the best idea to always follow the smartest guys in the room. Sometimes they can get into special situations that may have a risk profile that is beyond anything individual investors ever want to find themselves involved with.
Top-tier money managers favor companies with impenetrable moats
Sean Williams (Sirius XM Holdings): Although it's not a stock that'll make front-page news often, if ever, Sirius XM Holdings, the only satellite radio provider, has been the apple of some prominent investors' eyes of late.
Following 13F filings with the Securities and Exchange Commission in mid-November, multibillionaires James Simons, the founder of famous quant fund Renaissance Technologies, and Kenneth Griffin, who runs Citadel Advisors, have been acquiring shares of Sirius XM. And do I fault them for their purchases? Not one bit.
You see, Sirius XM has a handful of competitive advantages that give it a somewhat impenetrable moat. Perhaps the biggest difference between Sirius and, say, terrestrial or online radio is that its competitors are acutely reliant on advertising to drive revenue. The thing is, advertising ebbs and flows with the health of the U.S. economy. Meanwhile, Sirius XM generated only $46.2 million from advertising in the third quarter out of $1.47 billion total sales. Even if its ad-pricing power were to weaken or ad demand were to slow, the impact would hardly be noticeable.
To expand on this point, Sirius XM generates most of its revenue from subscriptions and royalties. Consumers are far less likely to cancel locked-in subscriptions than advertisers are to pull back on marketing during times of economic turbulence. It's yet another feather in Sirius XM's cap.
It's also worth mentioning that Sirius XM has a relatively fixed-cost model. Whereas talent-acquisition costs can vary, its satellite network expenses are pretty much the same, regardless of how many subscribers it adds each quarter or year. This creates a scenario in which Sirius XM should be able to expand, or at worst maintain, its operating margins as time passes.
Consider this one of those instances when investors should be paying close attention to what the big money is doing with Sirius XM.