Regardless of whether you're a Wall Street professional or everyday investor, it's been a difficult year. The broad-based S&P 500, which is often viewed as the best barometer of stock market health, delivered its worst first-half return since 1970. Meanwhile, the tech stock-driven Nasdaq Composite pushed well into a bear market with a peak-to-trough decline of 34% between November and June.
There's no denying that stock market volatility and the velocity of downside moves during sizable pullbacks can make investors question their resolve to stick around. But it's also true that patient investors are often handsomely rewarded for going on the offensive during these dips. Just ask billionaire hedge fund manager Ken Griffin of Citadel Advisors.
Image source: Getty Images.
Citadel is a hedge fund with over $50 billion in assets under management and thousands upon thousands of positions, as of May 2022. Citadel often hedges its stakes with various put or call option strategies, which is why it has so many open positions.
But what really stands out in the company's second-quarter 13F filing with the Securities and Exchange Commission is how Ken Griffin oversaw the sizable purchases of a number of high-profile companies as the stock market plunged. Here are five of the stocks Ken Griffin bought hand over fist as the bear market took shape.
Meta Platforms
Not including Citadel's options positions, social media giant Meta Platforms (META 0.43%) is Griffin's largest stock holding. During the second quarter, Citadel added just over 4 million shares of Meta, which increased the fund's stake to 4.58 million shares.
Although Meta has been hammered by higher expensing tied to its metaverse investments, and is struggling under the weight of weaker ad spending in an uncertain economic environment, the company still possesses clear-cut competitive advantages that Griffin and his investing team find attractive.
For example, Meta's family of apps, which includes Facebook, WhatsApp, Instagram, and Facebook Messenger, had 3.65 billion monthly active users between the beginning of April and end of June. That's more than half the world's adult population visiting a Meta-owned asset each month. Advertisers are well aware that there's no other social platform that'll give them access to as many eyeballs as Meta's social media assets. This is what gives the company such impressive ad-pricing power.
Griffin is likely also intrigued by Meta's aggressive investments in the metaverse -- i.e., the next iteration of the internet, which allows users to interact with each other and their environment in a 3D virtual world. While it could be years before these investments pay off, the metaverse looks to be a multitrillion-dollar opportunity. If CEO Mark Zuckerberg is correct, Meta could be one of the key onramps to this next-big-thing investment.
Bank of America
Financial behemoth Bank of America (BAC -0.21%) is a second high-profile stock Griffin bought hand over fist in the second quarter. After purchasing nearly 4.7 million shares of BofA in the first quarter, Citadel added close to 505,000 more shares in the recently ended quarter.
Despite the incredible amount of hedging in Citadel's portfolio, Ken Griffin is almost always thinking long-term when buying high-quality businesses. The benefit of owning a cyclical stock like Bank of America is that it can take advantage of the disproportionately long periods the U.S. economy spends expanding, relative to contracting. This allows the company to steadily grow its loans and deposits over time.
Bank of America is also unique positioned among large bank stocks to take advantage of the Federal Reserve's hawkish monetary policy. With inflation hitting a more than four-decade high of 9.1% in June, the nation's central bank is rapidly increasing interest rates. BofA is the most interest-sensitive of America's money-center banks. The company estimates that a 100-basis-point parallel shift in the interest rate yield curve over the next 12 months will generate $5 billion in added net-interest income.
And if that's still not enough, Bank of America is cheap. It can be purchased for about 9 times forward-year earnings and trades only modestly above its book value.
Image source: Getty Images.
Microsoft
A third well-known stock Ken Griffin can't seem to get enough of is software kingpin Microsoft (MSFT 1.82%). "Ole Softy" has been a continuous holding of Citadel's for the past 20 years. During the second quarter, Griffin's fund increased its stake 265% by purchasing an aggregate of more than 987,000 shares.
What makes Microsoft such a great stock to own over the long run is the perfect balance between its cash cow legacy operations and the potential for its high-growth initiatives.
As I've previously pointed out, Microsoft's Windows operating system (OS) is nowhere near the growth story it was two decades ago. But with Windows maintaining about three-quarters of all OS desktop market share worldwide, the segment continues to generate incredible cash flow for the company. Microsoft's legacy segments are fully capable of producing high margins and significant cash flow that the company can redirect to faster-growing initiatives or acquisitions.
As for those "faster-growing initiatives," it's pretty evident that Microsoft is fully focused on the cloud. Cloud-computing initiatives have helped lift some legacy operations back to sustained double-digit sales growth. Cloud infrastructure service platform Azure continues to lead the way with year-over-year sales growth of nearly 50%, excluding currency movements.
Palo Alto Networks
The fourth high-profile company hedge fund manager Ken Griffin piled into as the market plunged is cybersecurity stock Palo Alto Networks (PANW 0.91%). Citadel, which has held shares of Palo Alto for close to 10 years, added nearly 281,000 shares in the second quarter.
The best aspect of cybersecurity stocks is that they're exceptionally defensive. No matter how poorly the U.S. economy or stock market perform, hackers and robots don't take time off from trying to steal enterprise or customer data. As hacking efforts have become more sophisticated, cybersecurity solutions have evolved into a necessity for businesses of all sizes.
The intrigue surrounding Palo Alto Networks has to do with its four-year (and counting) transformation that's seeing it push into cloud-based software-as-a-service subscriptions and away from physical firewall products. In five years, the percentage of full-year sales derived from subscriptions has grown from 59.7% to 75.2%. Subscriptions sales provide higher margins than physical products, and should significantly minimize the revenue lumpiness associated with product upgrade/replacement cycles.
Look for the buzz surrounding Palo Alto Networks to really pick up later this week, which is when the company is slated to undergo a 3-for-1 forward stock split.
Amazon
The fifth and final stock billionaire Ken Griffin bought hand over fist as the market plunged is FAANG stock Amazon (AMZN 3.43%). The most recent quarter saw Citadel add almost 1.26 million shares of the e-commerce juggernaut, which increased its total position to roughly 4.78 million shares.
On one hand, Amazon is contending with numerous headwinds. Historically high inflation and back-to-back quarters of U.S. gross domestic product declines are adversely impacting its online retail business, and threaten to reduce near-term spending on ads. Amazon is generating about $35 billion in annual run-rate revenue from its advertising services.
On the other hand, the company's dominant online retail marketplace isn't critical to the company's long-term growth. Instead, it's Amazon's ancillary operating channels that are expected to do the heavy lifting when it comes to operating cash flow growth. As an example, Amazon's marketplace has helped the company sign up over 200 million Prime members globally. That's nearly $35 billion in annual, high-margin, run-rate revenue.
More importantly, cloud infrastructure service platform Amazon Web Services (AWS) hasn't missed a beat. AWS is the world's leading cloud-service provider, with an estimated 31% of worldwide market share, per Canalys, as of the end of the second quarter. Despite accounting for a sixth of Amazon's net sales, AWS has consistently produced over half the company's operating income. As AWS grows into a larger percentage of Amazon's total revenue pie, it'll have a disproportionately positive impact on cash flow generation.
