While following the best and brightest on Wall Street isn't exactly a solid stock-picking strategy, it can be a good way to generate new ideas. Wall Street's top investors, after all, have proven track records when it comes to separating the wheat from the chaff.
Kodiak Sciences (KOD 1.50%), Microsoft (MSFT 0.37%), and General Motors (GM -0.04%), for instance, have each attracted the attention of some of the smartest investors as of late. Three of our Motley Fool contributors discuss below whether these three names should also appeal to retail investors.
Image source: Getty Images.
A top pre-revenue biotech
George Budwell (Kodiak Sciences): Hedge fund managers Felix and Julian Baker are arguably the best in the game at picking developmental-stage biotech stocks. Although this dynamic duo has had their fair share of misses in this highly volatile space, their wins have easily outpaced their losses over the past decade. The net result is that the Baker brothers have built one of the most valuable healthcare-oriented funds -- dubbed "Baker Bros. Advisors" -- in the world. So, when this all-star team buys a sizable chunk of a biotech company, investors may want to take notice.
During the fourth quarter of 2018, for example, Baker Bros. Advisors reportedly bought a whopping 25% stake in clinical-stage biotech Kodiak Sciences. Kodiak is in the midst of developing an early-stage treatment for macular degeneration and diabetic macular edema known as KSI-301. If this experimental medicine pans out, it would enter a market currently valued at over $5 billion. That's a monstrous commercial opportunity for a company with a market cap hovering around a mere $265 million at the time of writing.
The downside to this story is that Kodiak is almost certainly a few years away from filing a regulatory application for KSI-301 -- or any of its other clinical candidates, for that matter. That means the company will likely have to resort to secondary offerings to pay its bills in the years ahead. Early-bird shareholders should thus expect to be diluted as Kodiak's clinical pipeline and business development plan mature.
Rebound potential and big yield at clearance prices
Keith Noonan (Microsoft): Microsoft stock has been on a tear over the last several years, with the company's successful pivot to a cloud and subscription-based model powering strong earnings growth and paving the way for more ahead. The software giant delivered the Dow's third-best stock performance in 2018, and Wall Street remains bullish on the company's prospects -- with some 89% of analysts polled by FactSet rating the stock as a worthwhile buy.
Along with Amazon, Microsoft has solidified itself as a leader in the cloud services space, and it's well positioned to benefit from ongoing growth there. Some investors have recently been fretting over a growth slowdown for the company's Azure platform, but continued migration of software to the cloud, growth for the overall amount of web content and businesses, and the company's entrenched position in enterprise and productivity software are creating long-term expansion opportunities. Microsoft's product suite is further supplemented by a solid position in the content space thanks to its Xbox gaming platform, video-game development studios, and online services.
Strong individual offerings and synergy across products make the company a worthwhile investment for long-term shareholders even as shares trade not far removed from their lifetime highs. The company has a sturdy, dependable business and a variety of recurring revenue streams that should make baseline performance relatively predictable -- as well as potential growth catalysts like mixed-reality hardware and software and Internet of Things devices and services that could help it substantially outperform expectations.
An undervalued automaker
Jeremy Bowman (General Motors): General Motors stock has been a good value pretty much since the car maker emerged from bankruptcy nearly a decade ago. Today, the stock trades at a P/E ratio of less than 6, and GM is fresh off another stellar earnings report, forecasting continued profit growth in 2019. Meanwhile, the company is well positioned in the autonomous-vehicle revolution with its Cruise division, and it's making smart moves to control its costs and balance its exposure around the world.
Throw in a 3.9% dividend yield, and it's a not a surprise that some of the biggest investors on Wall Street have taken notice. Warren Buffett's Berkshire Hathaway has owned GM since 2012, but the Oracle of Omaha added to his holdings in the third quarter (the most recent period that's been reported) of 2018, buying another 1.06 million shares of the Chevy maker and bringing its total to 52.5 million, a stake worth about $2 billion.
As a big-brand, dividend-paying, value stock, General Motors is a classic Buffett pick. However, he's not the only respected investor buying GM. Greenlight Capital's David Einhorn owns about 14 million shares of the car maker, though he has trimmed his position lately as it made up 21% of his portfolio at one time.
In total, 61 hedge funds held positions in GM at the end of the third quarter, two more than at the end of the second quarter, according to Insider Monkey.
Considering the stock's cheap price, strong performance in North America, and leading position in AV technology, investors would be wise to follow Buffett and the others into GM.
Check out the latest GM and Microsoft earnings call transcripts.
