Every quarter, professional investment managers are required to report their holdings with the Securities and Exchange Commission (SEC). These gurus typically have years of experience earning market-beating returns for their clients. In short, checking up on what stocks these investors are buying can lead to your next big winner.
After browsing through several stock holdings of various fund managers, three caught my eye: Electronic Arts (EA 1.08%), Facebook (META 3.41%), and Micron Technology (MU 2.99%). Here's why these three stocks look promising.
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1. Electronic Arts: Market-beating returns in video games
The video game industry has experienced tremendous growth over the past decade. Electronic Arts has been a beneficiary, as the stock has more than doubled over the last five years, handily beating the market averages.
A few top professional investment managers see more growth in store. David Rolfe of Wedgewood Partners, Thomas Gayner at Markel, and Lee Ainslie at Maverick Capital bought shares of EA in the third quarter.
EA stock got hammered along with other top video game makers in late 2018, but the last quarter showed improving fundamentals with some of EA's core games, which could be a sign of a new trend taking shape.
While EA is nursing declining demand for sales of packaged games, sales of digital content climbed 8% over the last year. In the last quarter, management gave credit to strong engagement in EA Sports titles, such as FIFA and Madden, as well as other titles like The Sims 4 and Apex Legends for driving strong growth in live services (or in-game spending).
With new growth opportunities across subscription services, cloud gaming, and esports, now might be a good time to consider taking a small position in one of the leading video game companies in the world. EA shares trade for 21 times next year's earnings estimates, and analysts currently expect earnings to grow 8% per year over the next five years.
2. Facebook: Ad revenue still growing
Shares of the social media giant took a beating amid concerns about security and privacy issues, which have caused Facebook to spend huge sums to address the issues raised. It certainly doesn't help matters that CEO Mark Zuckerberg has been dragged into the spotlight before the U.S. Congress.
The scrutiny over social media privacy and other issues brought the stock's valuation down to an attractive level relative to growth. Even after rising 53% year to date, the stock still trades for 24 times earnings estimates, which seems low given the steady growth in daily active users and revenue, and the 18.6% year-over-year growth rate in net income last quarter.
A few top money managers seem to like the stock at these levels. In the third quarter, Pat Dorsey of Dorsey Asset Management and David Tepper of Appaloosa Management added to their respective firms' positions. There are several other respected investment managers holding shares, making Facebook one of the most widely owned stocks among hedge funds.
It's easy to see why. Facebook is still an enormously valuable business, with 2.8 billion users across the company's various platforms, including Facebook, Instagram, WhatsApp, and Messenger. Ad revenue across these platforms soared 28% year over year last quarter.
The company is working on several initiatives that could pad growth going forward, including Instagram Shopping and payments, and testing new ads with augmented reality.
Despite the scrutiny over privacy and security, Facebook still has one of the most valuable advertising platforms in the world, which makes it a stock worth considering for the long haul.
3. Micron Technology: Catching the upcycle in memory prices
Micron is one of the leaders in making storage and memory products for consumer PCs, mobile devices, game consoles, graphics cards, cloud servers, and the automotive market. It's a highly competitive industry, with several firms, including leader Samsung Electronics, providing products with no significant differentiation between them. As a consequence, profit can be lumpy year to year, but one noteworthy investment manager has been buying shares lately.
Mohnish Pabrai, the author of The Dhandho Investor, originally took a position in the fourth quarter of 2018, according to filings with the SEC. He has added to his position every quarter since.
Storage and memory products often experience wild price swings, which causes volatility in profit and makes Micron very difficult to value using the popular price-to-earnings ratio. However, the growth in shareholders' equity (or book value) has increased more predictably over time, which provides a better metric with which to value the stock.
The stock's price-to-book value ratio has fallen from more than 3 times to as low as 1 times in the last year, which can be a sign that a stock is undervalued. It's apparent that Pabrai started buying as the stock fell to the lower end of its historical trading range on a price-to-book value basis.
MU Price to Book Value data by YCharts.
Micron is currently in the trough of the market cycle for memory prices. The stock is up 51% year to date, but analysts are expecting the industry to recover as early as next year, which could see Micron's stock price rebound further.
