Billionaires dedicate a lot of resources to researching their investments, so the rest of us could benefit from paying attention to their decisions. The ultra wealthy don't always make the best investments, and your goals might not necessarily align with a billionaire's, but it can still be a great way to identify high-quality businesses with reasonable valuations.
These three stocks have significant billionaire ownership, and they have impressive fundamentals to support that.
1. Amazon
Amazon (NASDAQ: AMZN) is a popular choice among billionaires and hedge fund managers: Ken Griffin, Daniel Loeb, and Andreas Halvorsen all have large positions in the stock. It offers reliable revenue growth, diversified operations, and impressive cash-flow generation, along with a wide economic moat that should protect its competitive position.
AMZN revenue (TTM) data by YCharts; TTM = trailing 12 months.
Amazon faces increasing competition from the likes of Shopify (NYSE: SHOP) , and COVID-19 caused volatility in online shopping demand. Nonetheless, the long-term trends are promising for its core e-commerce business.
It has absolutely dominant market share that has slowly increased over the past few years. E-commerce's share of overall retail spending is increasing, and the company should reap the benefits as the incumbent market leader.
Image source: Getty Images.
It also maintains a leadership position in cloud infrastructure with Amazon Web Services (AWS), and its Prime membership includes one of the more popular media platforms. They both function in highly competitive markets, but they diversify the company's sources of cash flow. They could also prove to be valuable sources of data as tech giants develop and train AI software.
The stock's price-to-free-cash-flow ratio of 36 might look a bit rich for some investors, but Amazon's operating earnings and cash flow grew more than 75% in its most recent quarter. The prospect of continued earnings growth can justify that valuation for long-term investors.
2. Visa
Visa (NYSE: V) is an important holding for the likes of Warren Buffett and hedge fund manager Steven Schonfeld. The payment processing company is a mature and well-known brand that many investors might not recognize as a fintech stock .
Payment processing has experienced significant disruption in recent years. Innovative solutions have improved the speed and efficiency of transfers, leading to lower costs. Disruption tends to threaten incumbents, but Visa has remained at the top of its industry. It holds roughly 50% market share, depending on which methodology and data source you consider.
Visa benefits from efficiencies of scale, which are an obstacle for new entrants. Its scale also allows it to outspend most competitors on product development and strategic acquisitions. It's a well-run business that produces steady revenue and cash-flow growth.
V revenue (TTM) data by YCharts.
Instead of shying away from the disruptive potential of blockchain and other technologies, Visa is leaning into it. The company supports internal and external projects to enhance its payment solutions with new software. This has driven innovation on a range of financial functions, such as cross-border transactions, account fee abstraction, central bank digital currencies, and cryptocurrency -linked payment cards.
It's not easy to find a gigantic incumbent that produces tons of cash flow and is also likely to benefit from the disruption of its industry. The stock is available at a forward price-to-earnings (P/E) ratio of less than 25, and it pays a small dividend yield. That should be enticing for long-term investors.
3. Home Depot
Home Depot (NYSE: HD) leads the home-improvement retail industry with nearly 30% market share. The company's market dominance and prospects have caught the attention of billionaire investors David Shaw and Ken Fisher.
Home Depot's scale provides meaningful competitive advantages. It has a vast geographic footprint of stores, which is useful for supply logistics and to attract more foot traffic. Scale also provides negotiating leverage to minimize supplier prices, making it difficult for competitors to undercut it.
Home improvement is a cyclical industry that fluctuates with consumer confidence, interest rates, and the housing market. That occasionally results in lean times for Home Depot, such as the one that we're experiencing right now. However, the long-term trend is positive, and there are clear catalysts for the future.
HD free cash flow data by YCharts.
Homeownership rates have recovered since the 2015 trough after the global financial crisis, but ownership is historically low for young adults. Many economists see this creating pent-up demand in future decades, with large cohorts of adults set to become new homeowners through either inheritance or improved financial circumstances. That should create favorable conditions for the home-improvement sector, and Home Depot shareholders are positioned to benefit from this trend.
Like Visa, Home Depot has a reasonable valuation with a forward P/E of less than 25. It also pays an attractive 2.6% dividend yield, so it provides a modest cash return along with the potential to appreciate over time.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Ryan Downie has positions in Amazon and Visa. The Motley Fool has positions in and recommends Amazon, Home Depot, Shopify, and Visa. The Motley Fool has a disclosure policy .
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