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The publication in 2005 of Joel Greenblatt's book " The Little Book That Beat the Market " caused a sensation as it opened up a unique opportunity for investors. The investing strategies used by the famed value investor were suddenly available for all to use and apply to their own portfolio.
As it approaches its 20th anniversary, the book is considered an investing classic that peeled back the curtain on some of the more complex investments on the market: mergers and acquisitions, spin-offs, and restructurings. Greenblatt showed investors how to dissect them for profit.
Today Greenblatt runs Gotham Asset Management , a hedge fund with $4.2 billion in assets under management. It is what you would call diversified. Gotham owns more than 1,400 stocks. Not all of them are special situations.
In fact, three of the top five holdings in Gotham's portfolio are exchange-traded funds (ETF) that track the S&P 500 index: SPDR S&P 500 ETF Trust ( NYSEARCA:SPY ), Greenblatt's own Gotham Enhanced 500 ETF (NYSEARCA:GSPY), and iShares Core S&P 500 ETF ( NYSEARCA:IVV ).
The other two positions are mega cap stocks not undergoing a restructuring, merger, or even a spinoff. They have been powerhouse stocks driving the market higher. Let's dive in to see why he likes them so much.
Key Points About This Article:
- Billionaire investor and author Joel Greenblatt opened the eyes of millions of investors to the rich opportunities to be found in special situation investing through his book "The Little Book That Beat the Market."
- With $4.2 billion in assets under management, Gotham Asset Management owns over 1,400 stocks. His top positions are mostly index-tracking ETFs. The only two stocks among the top five holdings are discussed in detail below.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.
Nvidia (NVDA)
Although it is not the same wunderkind stock it's been over the past two years, artificial intelligence chipmaker Nvidia ( NASDAQ:NVDA ) remains a massive growth vehicle. Its AI-enhanced graphics processing units (GPUs) still own the high-compute data center market and its rivals remain a generation or two behind catching up.
Yet having come so far, so fast, NVDA shares are not cheap . Even with the stock down 10% from its all-time high, Nvidia trades at 60 times trailing earnings, 31 times next year's estimates, and an incredibly high 32 times sales. There is a reason two dozen money managers have either reduced by half their exposure to the chipmaker or have sold out completely.
Yet not Greenblatt. Like a true value investor, he is contrarian. And when everyone was rushing for the exits, his Gotham Asset Management was running in. He bolstered his already sizable position with another huge buy. Greenblatt purchased almost another half million shares, a 46% increase in the total, bringing his ownership stake up to 1.53 million shares. Valued at $192.5 million, Nvidia is the third-largest holding in the portfolio or 2.5% of the total.
Appreciating the support Greenblatt's given the stock, Nvidia has nearly doubled in value from Gotham's $61 per share average buy-in price. Even from his recent purchase, which has a near-$107 per share price tag, NVDA stock is still up over 18%.
Microsoft (MSFT)
The second-largest individual stock holding in Greenblatt's top five positions is Microsoft ( NASDAQ:MSFT ). The money manager has 213,390 shares after bumping his stake 10% higher in the second quarter by acquiring nearly 21,000 more shares at an average cost of $434 per share.
As that is well above the $171 per share price tag across all of his purchases, valuing his holdings at almost $94 million, it suggests Greenblatt sees significant growth potential still in the cards for the tech giant. That's not a popular view on Wall Street as billionaires were dumping the stock en masse in the second quarter, yet the deployment of AI across Microsoft's suite of products and services helped supercharge its stock.
MSFT shares are up 39% over the past year as its cloud services business Azure was particularly energized. Segment revenues surged 29% higher in the second quarter to $28.5 billion, giving Azure a 23% share of the market.
Microsoft is a much different company today than it was even a decade ago. AI has infused the tech stock with new relevance that it hasn't seen in a long time. While it will ultimately come down to its clients being able to wring cost efficiencies out of AI technology to justify the costs, right now Microsoft is enjoying a growth phase that should be sustainable for some time.
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