By Matt Doiron
Several weeks after the end of a fiscal quarter, hedge funds and other major investors are required to issue 13F filings which disclose many of their long equity positions in U.S. stocks as of the end of that quarter. The SEC then makes these filings public, enabling investors to use the 13Fs in many ways. We work on developing investment strategies based on 13Fs, and have found that (for example) the most popular small cap stocks among hedge funds tend to outperform the S&P 500 by 18 percentage points per year (see more details about hedge funds' small cap picks).
The Bill and Melinda Gates Foundation operates a trust which invests excess capital in order to ensure that the foundation will be able to continue its work in the long term. That trust recently filed its 13F, and given its identity as a long-term investor (as opposed to a hedge fund, which may earn higher returns over time but may also make more high-maintenance, short-term trades) its picks may be of interest to some investors. Read on for our quick take on these stocks, and feel free to do more research on any that sound appealing:
Even though the trust sold some of its shares in Berkshire Hathaway Inc. (BRK.B) it still owned over 87 million shares. Bill Gates and Warren Buffett have a friendship as well as a shared commitment to philanthropy; Buffett has been a major contributor to the Gates Foundation. Berkshire, which recently announced an acquisition of Heinz, is a common pick among value investors who are enamored with Buffett. The stock does trade at a premium to book value, and we are not quite convinced that it is a good long-term pick due to succession issues (find Warren Buffett's favorite stocks).
Speaking of Buffett's favorites, his largest holding- The Coca Cola Company (KO) was another of the trust's top picks with 34 million shares in the Gates Foundation's portfolio (up from 23 million three months earlier). Last quarter the soft drink company experienced a 13% increase in earnings compared to the fourth quarter of 2012, primarily on higher margins but also thanks to modest revenue growth. With a beta of 0.4, Coca-Cola is a fairly defensive stock but it does have growth prospects due to globalization. The trailing P/E is 19.
The trust also likes bottler Coca-Cola Femsa, S.A.B. de C.V. (KOF), which operates in Latin America. Population growth and growing economies in Latin American countries give Femsa a long-term growth story, and both revenue and net income growth have been high recently. However, the stock's valuation already takes some future growth into account: the trailing and 2013 P/E multiples are 34 and 27, respectively. The company could still be worth considering, but it would have to sustain its high growth rates for a considerable period of time to justify its current valuation.
Caterpillar Inc. (CAT) was another of the trust's favorite stocks, and is another company poised to benefit from global growth over the next several years or even decades. While this has burned them at times- for example, the company was recently forced to write down a large Chinese investment- the stock trades at only 11 times trailing earnings and so only needs to keep its earnings steady from our point of view. Analyst estimates imply a five-year PEG ratio of 0.9. While its recent troubles do reflect poorly on Caterpillar's management it could be a value play.
The Bill and Melinda Gated Foundation Trust's top five picks finished up with McDonald's Corporation (MCD), which had been the most popular restaurant stock among hedge funds in the third quarter of 2012 (check out the full top ten list). The 13F reported a position of 9.9 million shares. McDonalds has been recording very modest growth rates recently, though its earnings multiples- in the teens- are well below those of other quick service restaurants. The stock also pays a dividend yield of just above 3%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.