The Bill and Melinda Gates (BMG) Foundation Trust generated a 47% return during the three-year period that ended in March, while the S&P 500 (^GSPC +0.84%) returned a less impressive 32%. As of the first quarter, the BMG Foundation Trust had 66% of its assets invested in just three stocks.
- Microsoft (MSFT 1.33%) accounted for 34% of the portfolio.
- Berkshire Hathaway (BRK.A +0.16%) (BRK.B +0.18%) accounted for 16% of the portfolio.
- Waste Management (WM 2.75%) accounted for 16% of the portfolio.
Those companies have been brilliant long-term investments. All three stocks outperformed the S&P 500 over the last three years, and two have been particularly resilient during bear markets. Are they still worth buying?
NASDAQ: MSFT
Key Data Points
Microsoft: 34% of the BMG Foundation Trust
Microsoft reported impressive financial results in the third quarter of fiscal 2024 (ended March 31). Revenue rose 17% to $61.9 billion and GAAP net income jumped 20% to $2.94 per diluted share. Momentum in enterprise software and cloud computing, fueled by demand for artificial intelligence services, were the driving forces behind that strong performance.
The bull case for Microsoft is straightforward. It is the largest enterprise software company and the second largest cloud services provider in the world, and those market are projected to grow at annual rates of 14% and 21%, respectively, through 2030. Additionally, Microsoft is creating new revenue streams in both segments with artificial intelligence products like Microsoft 365 Copilot and Azure OpenAI Service.
Going forward, Wall Street expects Microsoft to grow earnings per share at 13.7% annually over the next three to five years. That estimate leaves room for upside given that Microsoft has yet to monetize AI software and services in earnest. However, if we assume Wall Street is correct, the current valuation of 36 times earnings is somewhere between reasonable and expensive.
I say that because the PEG ratio -- the price-to-earnings multiple divided by forecasted earnings growth -- is currently 2.6, a premium to the three-year average of 2.4. Personally, I would wait for a slightly cheaper price before buying this stock, but I think patient investors can purchase a small position today.
NYSE: BRK.B
Key Data Points
Berkshire Hathaway: 16% of the BMG Foundation Trust
Berkshire Hathaway reported solid first-quarter financial results. Revenue rose 5.2% to $90 billion on strong momentum across its insurance subsidiaries. Meanwhile, operating earnings (which eliminates the impact of investment gains and losses) increased 39% to $11.2 billion, beating even the highest estimate from Wall Street.
The bull case for Berkshire centers on is its strong presence in property and casualty insurance, which provides CEO Warren Buffett with a consistent stream of cash in the form of premiums. Buffett has invested that capital to great effect over the years. As proof, Berkshire's book value per share increased at 11% annually over the past decade.
Berkshire also owns several dozen subsidiaries that operate across a diverse range of industries, including freight rail transportation, utilities, energy, manufacturing, and retail. Many of those subsidiaries provide essential goods and services, which makes Berkshire a resilient business. For that reason, the stock has consistently outperformed the S&P 500 during bear markets, as shown in the chart below.
|
Bear Market Start Date |
S&P 500 Maximum Decline |
Berkshire Hathaway Maximum Decline |
|---|---|---|
|
March 2000 |
(49%) |
(24%) |
|
October 2007 |
(57%) |
(54%) |
|
February 2020 |
(34%) |
(30%) |
|
January 2022 |
(25%) |
(27%) |
|
Average |
(41%) |
(34%) |
Data source: Yardeni Research, Ycharts.
Going forward, Warren Buffett believes Berkshire can outperform the average U.S. business, which is another way of saying it can outperform the S&P 500. "Berkshire should do a bit better than the average American corporation and, more important, should also operate with materially less risk of permanent loss of capital," he wrote in his latest shareholder letter.
NYSE: WM
Key Data Points
Waste Management: 16% of the BMG Foundation Trust
Waste Management reported mixed results in the first quarter. Revenue increased 5.5% to $5.2 billion, lagging the 6.7% growth Wall Street expected. But GAAP net income still jumped 35% to $1.75 per diluted share, easily beating the 15% growth analysts anticipated.
The bull case for Waste Management centers on its position as the largest waste collection and disposal services provider in North America as measured by revenue. The company also controls 28% of U.S. landfill volume, while its closest competitor controls 20%. Brian Bernard at Morningstar says that advantage is "nearly impossible to replicate given immense regulatory hurdles."
More broadly, Waste Management provides essential services, meaning demand should remain roughly constant though economic ups and downs. Additionally, its vast network of transfer stations and landfills creates an economic moat that affords the company pricing power. Brian Bernard recently wrote, "Landfill scarcity has supported pricing power for [Waste Management] with annual core price increases consistently exceeding inflation."
Those qualities make Waste Management a resilient business and, like Berkshire Hathaway, its stock has consistently outperformed the S&P 500 during bear markets.
|
Bear Market Start Date |
S&P 500 Maximum Decline |
Waste Management Maximum Decline |
|---|---|---|
|
March 2000 |
(49%) |
(33%) |
|
October 2007 |
(57%) |
(43%) |
|
February 2020 |
(34%) |
(30%) |
|
January 2022 |
(25%) |
(17%) |
|
Average |
(41%) |
(31%) |
Data source: Yardeni Research, Ycharts.
Going forward, the waste management market is projected to grow at 5.4% annually through 2030. Wall Street expects Waste Management to grow earnings per share at 11.1% annually over the next three to five years. That estimate makes the current valuation of 33 times earnings seem a bit pricey. Those numbers give a PEG ratio around 3, but I would feel more comfortable buying shares if the multiple was closer to 2.
