The U.S. equity market has had a tough few weeks, primarily due to escalating economic tensions, geopolitical pressures, and rising risks of trade wars. The tech-heavy Nasdaq Composite index was even pushed into correction territory in March, falling almost 14.2% from the recent high in December 2024.
While the market is gradually recovering, we may not be entirely out of the danger zone. Yet, this period also provides investors with a unique opportunity to acquire high-quality stocks at reasonable valuations.
One way to find smart investments is to consider where top hedge funds and billionaire investors put their cash. Retail investors can uncover new opportunities and decipher evolving trends by analyzing what the smart money is betting on. This is precisely what Securities and Exchange Commission Form 13F helps us do, by providing a peek into the investment activity of smart money.
Billionaire investor Israel Englander's Millennium Management hedge fund is famous for its low-risk style on Wall Street. Millennium has trimmed its positions in Nvidia and Microsoft by 10.5% and 43.7%, respectively, in the fourth quarter of 2024. There could be many reasons for these moves, but the most likely ones can be profit-taking, portfolio rebalancing, or putting capital into other high-growth opportunities.
With Englander's hedge fund having assets under management of nearly $75 billion, analyzing the billionaire's recent stock picks makes sense. Here's why these three stocks seem like smart buys even for retail investors.
Broadcom
Millennium increased its stake in semiconductor and networking giant Broadcom (AVGO 0.60%) by 535%, bringing its value to $1.7 billion, or 1.5% of the hedge fund's total portfolio at the end of the fourth quarter of 2024. For many reasons, it will make sense for retail investors to follow the hedge fund's lead.
In its fiscal 2025's first quarter (ended Feb 2), Broadcom reported record revenue of $14.9 billion, a 25% increase year over year, and consolidated adjusted earnings before interest, taxes, depreciation, and amortization of $10.1 billion, up 41% year over year. The company also reported a robust free cash flow margin of 40% in the first quarter.
The second reason is that Broadcom's AI business is a significant growth catalyst, with its three major hyperscaler customers increasing demand for its customized AI chips and networking solutions for building AI infrastructure including data centers and next-generation frontier models.
NASDAQ: AVGO
Key Data Points
With its focus on next-generation AI offerings and networking solutions, Broadcom is well positioned to benefit from this trend. CEO Hock Tan expects the target addressable market (TAM) generated by these three hyperscalers to be $60 billion to $90 billion by 2027.
The TAM can be even more significant if we consider business from four other hyperscalers dealing with Broadcom to create customized AI accelerators.
Third, the company is also seeing strong momentum in the infrastructure software business. The successful integration of its VMware acquisition has further strengthened the segment. Management has also transitioned over 60% of its perpetual software licenses to subscription models, providing high revenue visibility and predictability for its overall business.
Considering Broadcom's strength in the rapidly expanding AI infrastructure market and robust software business, it seems like an unmissable buying opportunity.
Meta Platforms
Millennium also increased its stake in social media and digital advertising giant Meta Platforms (META +2.31%) by 91%, bringing its total value to $1.5 billion, or 1.29% of the hedge fund's total portfolio, at the end of the fourth quarter of 2024. Meta is also a smart buy now for several reasons.
It has demonstrated exceptional financial strength, driven mainly by the rapid growth of its core digital advertising business. The company's Family of Apps segment (including Facebook, Instagram, Messenger, Threads, and WhatsApp) is highly profitable, with an operating margin close to 60%.
Meta also maintains a strong balance sheet with $77.8 billion in cash, far higher than its $28.8 billion in debt. This allows it to invest extensively in new research initiatives.
NASDAQ: META
Key Data Points
The company's scale has created an unmatched competitive advantage. With over 3.3 billion people, or nearly 40% of the global population, using one of its apps daily, it benefits from strong network effects.
As more people use the company's social media platforms, it has access to more proprietary data on their behavior, relationships, and preferences. Meta leverages this data to improve engagement on its platforms, attracting even more users.
A large and highly engaged user base also attracts more advertisers to these platforms, eventually driving up the top line. Since that base leads to better conversions and performance for advertisers, the company enjoys significant pricing power. This is evident from the solid 14% year-over-year growth in the average price per ad in the fourth quarter.
Management also plans to spend nearly $60 billion to $65 billion in fiscal 2025, mainly to build AI capabilities and infrastructure. The company's virtual AI assistant has already attracted more than 700 million users, and it's expected to top 1 billion by the end of 2025.
And Meta is working on open-source large language models, which can be crucial in helping penetrate the enterprise market and developer communities.
It faces several risks, including legal and regulatory challenges, increasing competitive pressures, and mounting losses in its Reality Labs segment. However, with the company's exceptional reach, strong financials, and a rapidly evolving AI strategy, Meta seems like a name worth paying attention to in 2025.
