Beating the market is a goal of every growth investor. There's no better place to look for stocks that can beat the market than prominent billionaire investors who have an interest in growing and protecting their wealth.
Bill Ackman of Pershing Square Capital Management and former Microsoft CEO and co-founder Bill Gates are great sources to find promising investment ideas in the stock market. Let's look at two of their top holdings that can outperform the S&P 500 index over the next five years.
1. Alphabet (Google)
Bill Ackman's net worth sits at $9 billion, according to Forbes magazine. His firm delivered 16% annualized returns to investors over the last 20 years through the end of 2023, which far outpaced the S&P 500's total return of 10% per year.
Ackman's firm started a position in Alphabet (GOOG +4.00%) (GOOGL +3.97%) last year, and it still held a large stake in the shares worth over $2 billion in the first quarter. The strong growth in the digital ad market led to a string of solid financial results that sent the stock up 26% over the last year.
NASDAQ: GOOG
Key Data Points
The stock was battered recently over the broader market sell-off and Alphabet's loss against the government in its antitrust case. A federal court ruled that Google's dominance in search was illegally gained through anticompetitive behavior. It's not yet determined what the remedies will be for Google, but its underlying strengths will still make it a solid investment for long-term investors.
Google has a wide competitive moat based on billions of users across its services. It has valuable data to train its artificial intelligence (AI) models. This gives the company excellent growth prospects in the $298 billion digital ad market, according to Statista.
Another reason to like the stock is the company's financial fortitude. It generated $60 billion in free cash flow on $328 billion of revenue over the last year. This is allowing the company to accelerate investments in AI infrastructure and data centers for future growth.
Nowhere is Alphabet demonstrating the potential of its AI capabilities more than Google Cloud, where it has significant momentum. Google Cloud revenue grew 28% year over year in Q2. The company says that over 2 million developers are using its generative AI solutions.
Investors can now buy the stock at a much cheaper forward price-to-earnings ratio of 21. At this valuation, the stock should deliver a return consistent with Wall Street's long-term earnings growth estimate of 17% per year. This should be enough to easily outpace the S&P 500 index.
2. Coupang
Forbes estimates Bill Gates' net worth at $130 billion, and much of Gates' fortune is going toward the philanthropy efforts of the Bill and Melinda Gates Foundation. The foundation trust has a U.S. equity portfolio worth $45 billion at the end of the first quarter. One of its holdings is Coupang (CPNG +0.38%), the leading e-commerce platform in South Korea, a position the foundation has held since early 2021.
Coupang is following Amazon's playbook by offering a wide range of items at competitive prices, in addition to a subscription service that provides fast shipping and other perks. The company's above-average growth shows it has the potential to be a monster winner for shareholders. The stock has climbed 20% over the past year.
NYSE: CPNG
Key Data Points
Revenue has accelerated over the last year to 30% year over year in the second quarter, excluding currency changes. Its active customer count grew 12% over the year-ago quarter. These are similar rates that made Amazon a richly rewarding investment over the last 20 years, and Coupang could be next.
Most of its growth is coming from existing customers, which reflects efforts to expand to non-retail services. For example, Coupang Eats is growing rapidly after being integrated with unlimited delivery in Coupang's WOW membership. Additionally, Coupang's video streaming service is gaining momentum. Growing interest in these services can lead to more sales in the commerce business.
Coupang is widening its selection and fulfillment capabilities. Its growing logistics infrastructure is paving the way for a significant opportunity in international expansion, where it is currently focused on growing in Taiwan.
The Gates Foundation probably wouldn't hold the stock if Coupang wasn't demonstrating the potential to be a very profitable business. It's not profitable on an earnings-per-share basis, but the business generated $1.5 billion in free cash flow over the last year on $25 billion of trailing revenue.
The stock trades at a reasonable price-to-free-cash-flow ratio of 27. Investors can expect the stock to climb in value consistent with Coupang's underlying revenue and free-cash-flow growth in the coming years. At the current growth trajectory, that could lead to market-crushing gains.
