Ray Dalio is one of the most successful hedge fund managers in history. His Bridgewater Associates is the largest hedge fund in the world, and his personal net worth is in excess of $15 billion.
While he stepped down as chief investment officer for the fund last year, his principles are still the basis for the investments that fund managers at the company use to make trades. His investment strategy involves following macroeconomic trends and finding businesses and other investments that can capitalize on those trends.
It also focuses on stock valuation, taking profits on fully priced stocks and reinvesting them into undervalued stocks.
Bridgewater has still been doing that. After spotting an opportunity to invest in two companies with significant exposure to digital advertising last year, Bridgewater took sizable positions in Alphabet (GOOG 1.06%) (GOOGL 1.08%) and Meta Platforms (META -0.28%).
But last quarter saw the fund reduce its stake in Alphabet and increase its stake in Meta. Here's what happened.
Changing favorites
Bridgewater initially took large positions in Alphabet and Meta in the third quarter of last year. The partnership ended the quarter with 0.7% of its portfolio in Alphabet Class A shares and 0.6% in Meta. It trimmed those positions in the fourth quarter before adding back even more in the first quarter of this year.
At one point, Alphabet accounted for 1.5% of the portfolio. But Bridgewater did some profit taking last quarter, culling the position. It sold 381,016 shares, nearly 20% of its position.
A lot of those proceeds went toward buying 84,494 shares of Meta, a 16% increase in its stake. (Although it's worth pointing out that Bridgewater took a lot of profits on Meta in the second quarter after a steep run-up in the share price.)
At the end of the quarter, Alphabet remained a bigger part of Bridgewater's holdings, accounting for 1.2% of the portfolio (its 10th largest individual stock holding). Meta wasn't too far behind, though, accounting for 1.2% of the portfolio (its 14th largest position).
The shift makes a lot of sense. Alphabet shares traded at a premium to Meta on a forward price-to-earnings (P/E) basis for nearly the entire quarter. And Bridgewater's analysts might be even more favorable toward Meta than Alphabet's prospects for the foreseeable future.
That said, the recent run-up in Meta shares has largely closed the gap in valuation based on analysts' forward earnings estimates.
Data by YCharts.
Two sides of the same coin
Alphabet and Meta are giants in the digital advertising industry. In fact, they combine to account for nearly half of U.S. digital ad spending.
After a setback in advertising spend last year due to various factors, including changes to regulations, the ability to track users across apps and devices, foreign exchange headwinds, and macroeconomic uncertainty, both are producing very strong revenue growth in 2023. Alphabet saw its top line improve 11% year over year last quarter, and Meta grew sales 23%.
What's more, both are becoming more profitable. Alphabet's operating margin expanded 3 percentage points to 28%, and Meta's operating margin doubled year over year to 40%.
Both stocks have worked out well for Bridgewater, including its most recent decision to shift more of its assets into Meta stock instead of Alphabet. (Meta has outperformed Alphabet shares by 10 percentage points since the end of the quarter.)
Considering the weight both stocks hold in Bridgewater's portfolio, the fund managers there seem to think there's still a lot of room for both stocks to outperform. Indeed, with strong earnings growth expectations for years to come and both stocks trading around just 20 times analysts' estimates for 2024 earnings, investors can do well with either stock.
