by David Sterman
Conviction-- a concept that is rarely heard in investment circles these days, but is still one of the key traits of top investors. When they have conviction, they stick with an investment idea for the long haul, undeterred by any near-term concerns that may shake their faith. Indeed, many investors will book profits if a stock has had a strong run. It's human nature -- for most of us. Microsoft (Nasdaq: MSFT) co-founder Bill Gates does the opposite. He continues to buy into his favorite ideas even after they've been powering higher.
Case in point: AutoNation (NYSE: AN).
I told you about his interest in the company three months ago when shares traded for about $26. His bullishness came at a time when many analysts thought that shares were fully-valued on the basis of near-term operating metrics.
With shares up about 42% to almost $34 since then, you'd think Gates might be content to book his profit. But he's buying even more. In fact he's made three huge purchases, boosting his holdings by roughly 1.7 million shares to about 13.7 million. All told, Gates' stake is worth about $468 million.
The perils of myopia
This remains a great example of why you need to think differently than Wall Street analysts. Let's take the analysis from UBS as an example. Back in October, 2009, it rated shares as a sell, predicting the stock would fall from $18 to $16. It noted that shares looked expensive on a price-to-earnings (P/E) basis. While Gates was starting to build a position, looking at where AutoNation will be in five years, UBS was only willing to look ahead to 2010.
Throughout 2010, UBS' analysts steadily raised their price target -- based on projected 2010 results -- yet always felt the stock was too expensive. They recently boosted their price target to $27, a price target based on expected 2011 results, and still think shares are overvalued. We can guess how next year will play out...
Room to move higher?
Shares of AutoNation are steadily rising higher on the back of a solid quarterly report that topped profit forecasts by nearly 30%. The auto retailer has clear momentum, but it's hard to call the stock a bargain at 17 times projected 2011 expected earning per share of about $2. Then again, that's not why Bill Gates is buying this stock.
Instead, Gates looks ahead to 2013 or 2014 when EPS could rise up to $3, as auto industry volume starts to rebound off of the current low levels. That's why shares could eventually approach $40. That's only about 18% upside from current levels, so you couldn't blame us mere mortals for taking some profits on a stock that has nearly doubled in the past year. But Bill Gates is no mere mortal.
Gates sure has the magic touch. The top 15 holdings in the foundation that he runs with his wife Melinda are all up during the past six months. AutoNation, Caterpillar (NYSE: CAT), ExxonMobil (NYSE: XOM), and Costco (Nasdaq: COST) are all up more than 30% in that time frame. His investments in McDonald's Corp. (NYSE: MCD), Wal-Mart (NYSE: WMT) and FedEx (NYSE: FDX) have barely budged, though. Perhaps his Midas Touch will work similar magic on these names as well.