Despite a seemingly endless parade of economic data and earnings reports, the most important data release of the quarter occurred on Monday, May 16, and there's a real possibility you missed it.
Last Monday marked the deadline for money managers with at least $100 million in assets under management to file Form 13F with the Securities and Exchange Commission. A 13F provides a snapshot of what some of the brightest minds on Wall Street bought and sold in the most recent quarter, which in this instance would be the first quarter. Even though the information is dated, it still provides clues as to what stocks and trends are captivating successful money managers.
With market volatility picking up in a big way this year, perhaps it's no surprise that highly profitable and time-tested stocks within the iconic Dow Jones Industrial Average (^DJI -0.31%) were popular buys. In particular, billionaire money managers bought the following four Dow stocks hand over fist in the first quarter.
The first Dow component that clearly had billionaire fund managers excited is tech kingpin Apple (AAPL 0.49%). Warren Buffett's Berkshire Hathaway, Jim Simons' Renaissance Technologies, and John Overdeck's and David Siegel's Two Sigma Investments, were big buyers. Not surprisingly -- Apple is Berkshire Hathaway's largest investment holding -- Buffett led the way by purchasing nearly 3.79 million shares.
Seeing billionaires pile into Apple is nothing new. The company's innovation, branding, and exceptionally loyal customer base have pretty consistently driven sales and profits to record highs. For instance, data from Counterpoint shows that Apple held 50% of U.S. smartphone market share during the first quarter. That's more than double its next-closest competitor.
But Apple's future is about far more than just crafting highly popular iPhone's, Macs, and iPads. Apple CEO Tim Cook is overseeing the company's steady transition to emphasize subscription services. Focusing on subscriptions should minimize the revenue lumpiness often observed during product replacement cycles, as well as encourage even more brand loyalty out of customers. Additionally, the margins associated with subscription services should lift Apple's operating margins over time.
Although I fully understand billionaires' rationale for buying into Apple, I'd be remiss if I didn't point out that it's the slowest-growing of the FAANG stocks and has relied on share repurchases to give its earnings per share a boost. While there's nothing wrong with that, Apple does appear somewhat pricey given its more modest near-term growth potential.
Billionaire money managers also took the market's first-quarter swoon as their cue to buy into payment processor Visa (V -0.65%). Gabe Plotkin of Melvin Capital opened a 1.49-million-share stake, while Steven Cohen's Point72 Asset Management and Ray Dalio's Bridgewater Associates more than doubled their respective positions.
As a general rule, financial stocks are cyclical, and therefore do poorly when recessions strike. Between historically high inflation and the Federal Reserve getting aggressive with interest rates, there's a growing likelihood of a recession occurring in the United States.
But the other side to this coin is that cyclical companies spend far more time thriving than struggling. While recessions typically last a few quarters, periods of expansion can extend for years, if not a decade. This allows a company like Visa to benefit from the natural expansion of the U.S. and global economy.
To add to this point, Visa also held a 54% share of credit card network purchase volume in the U.S. in 2020. That's 31 percentage points above the next-closest competitor in the largest market for consumption in the world.
Yet what really makes this company special is its discipline. Although Visa could easily become a lender and generate interest income and fees, it chooses to strictly act as a payment facilitator. Avoiding lending means Visa isn't exposed to loan delinquencies, and is therefore not required to set aside capital for loan losses. That helps it quickly bounce back from recessions.
Another Dow stock that was aggressively scooped up by billionaire fund managers in the first quarter is pharmaceutical company Merck (MRK -0.36%). Simons' Renaissance, Cohen's Point72, and Israel Englander's Millennium Management, respectively added 4.92 million shares, 3.53 million shares, and 1.78 million shares.
When market turbulence gains steam, healthcare stocks are often a smart place to put your money to work. No matter how well or poorly the stock market or U.S. economy perform, we can't control when we get sick or what ailment(s) we develop. There's always fairly consistent demand for prescription drugs, medical devices, and healthcare services in any environment.
More specific to Merck, Simons, Cohen, and Englander might be impressed with the growth potential of cancer immunotherapy Keytruda, which has more approved indications than I can count. Sales totaled $4.8 billion in the first quarter (up 27% on a constant-currency basis from the prior year) and can continue to climb due to pricing power and label expansion opportunities. Keytruda could eventually become the top-selling drug in the world.
The company's animal health segment has been a true bright spot as well. Companion animal drug sales have been consistently rising by a double-digit percentage (excluding currency movements). With pet owners willingly opening their wallets to ensure the well-being of their furry family members, this under-the-radar operating segment has become a gem for Merck.
Lastly, billionaire money managers bought tech giant Microsoft (MSFT -0.79%) hand over fist during the first three months of the year. Jeff Yass of Susquehanna International and Ken Fisher of Fisher Asset Management both purchased in excess of 1 million shares.
The way I see it, there are three factors that makes Microsoft a rock-solid investment in the eyes of Yass, Fisher, and the millions of folks who also own shares. To begin with, it's one of only two publicly traded companies with the highly coveted AAA credit rating from Standard & Poor's (S&P). This rating implies that S&P has the utmost confidence in Microsoft servicing and repaying its debts -- even more so than it does of the U.S. government making good on its own debts (the U.S. government has a AA credit rating).
Second, Microsoft's legacy segments continue to provide abundant operating cash flow that the company can redeploy into acquisitions or high-growth initiatives. For instance, even though Windows isn't the growth story it was two decades ago, GlobalStats data shows it controls roughly 75% of all desktop operating system market share worldwide, as of April 2022.
And third, it's hard not to get excited about Microsoft's incredible cloud growth. Cloud infrastructure service Azure delivered constant-currency sales growth of 49% in the first quarter. Microsoft is currently No. 2 in global cloud spending, with cloud growth still, arguably, in its early innings.
Microsoft is far from a sexy investment, but it's one that continually works for patient investors.