Reviewing what the world’s best investors are doing is a smart place to start when looking to stock a portfolio with winning investments. Understanding why they took stakes in specific companies can give investors the edge when deciding where to put their hard-earned funds.
With that in mind, we asked three Motley Fool investors to choose companies that the world’s best investors were adding to their portfolios. They offered convincing arguments for Apple Inc. (NASDAQ:AAPL), Netflix, Inc. (NASDAQ:NFLX), and Suncor Energy Inc. (NYSE:SU).
A powerful brand
Tim Green (Apple): Warren Buffett is unquestionably one of the greatest investors of all time. He makes his fair share of mistakes, but that doesn’t stop him from betting big when he sees an opportunity. Apple doesn’t seem like a typical Buffett stock, dependent on constantly churning out new consumer gadgets. But the Oracle of Omaha no doubt believes Apple’s brand provides a major competitive advantage.
Buffett’s Berkshire Hathaway went on a buying spree during the fourth quarter, scooping up 31.2 million additional shares of Apple. That brings the company’s total stake up to 165.3 million shares, worth around $28 billion. Apple is now Berkshire’s largest stock holding.
Apple is still heavily dependent on the iPhone, although newer products like the Apple Watch and its array of services are growing quickly. The biggest risks for Apple are the commodification of smartphones and the lengthening of the upgrade cycle. The company’s expensive iPhone X was an attempt to move prices higher to offset any potential decline in volume. Demand has reportedly been weaker than expected.
For Buffett, Apple’s brand loyalty is likely what matters most. iPhone users tend to stick with the iPhone, often not even considering the alternatives. That’s a recipe for outsized profits. How durable is that brand loyalty? Durable enough for Buffett to hurl nearly $30 billion into the stock.
Danny Vena (Netflix): Daniel Loeb, the investor behind activist hedge fund Third Point, has established one of the most enviable track records among hedge fund managers. Under his guidance, the Offshore Fund has generated an annualized return of 15.8% since December 1996 — nearly twice the return of the S&P 500. With a track record like that, it’s worth examining his recent purchases.
Among the most notable additions to Third Point’s holdings in the fourth quarter of 2017 was the purchase of 2 million shares of streaming pioneer Netflix. The purchase quickly vaulted the company into the top ten, making it the fund’s ninth-largest holding.
Netflix saw significant adoption in 2017, adding nearly 24 million members and increasing its subscriber count by 25%. Its worldwide customer base now numbers over 117 million, with more joining every day. Revenue grew to $3.3 billion in the fourth quarter, up 33% year over year, while net income of $67 million nearly tripled over the prior-year quarter.
With a total addressable market estimated at 450 million, Netflix could more than triple its existing customer base in the coming decade.
That isn’t the only reason to be bullish on Netflix. The company has demonstrated significant pricing power, as evidenced by its continuing stellar growth — even in the face of recent price increases. Netflix also stands to gain over time from its move to develop its own content, a strategy that spreads the cost of each project over a growing list of subscribers.
As its customer count grows and its content spending levels off, much more of the company’s revenue will make its way to the bottom line. With a significant track record of subscriber growth, increasing revenue, and steadily climbing contribution margins, it’s easy to see why one of the world’s best investors is buying Netflix.
A new oil name
Reuben Gregg Brewer (Suncor Energy Inc.): Although not a specific person, 1832 Asset Management is one of the largest asset management firms in Canada with over $100 billion under management. It recently added Canadian oil giant Suncor Energy to its portfolio.
Suncor is probably best known as a key owner and operator of Canadian oil sands projects. Oil sands are often considered a high-cost energy option, but that’s only half true. The big expenses are faced during the construction phase of an oil sands development. But once up and running, oil sands, which are mined, not drilled, are relatively cheap to operate. Suncor has tried to highlight that fact.
This is interesting right now because Suncor is coming to the end of the construction phase on a couple of new oil projects. One is an offshore oil project and the other is Fort Hills, an oil sands development, which is expected to ramp up to 90% of its full capacity by the end of 2018. The offshore endeavor, known as the Hebron project, is also starting to pump oil. All in, Suncor expects oil production to jump 10% in 2018 and 2019. Add in increasing oil prices and the low ongoing costs of the company’s core oil sands projects, and Suncor looks well positioned for the future.
Suncor is perhaps somewhat misunderstood by investors because of its oil sands exposure, which many see as a negative. With a dividend yield of 2.8%, slightly above its five-year average and notably higher than what you could get from an S&P 500 Index fund, investors might want to do a deep dive into Suncor. Perhaps 1832 Asset Management is seeing something others are missing.
Danny Vena owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Apple and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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