The average investor can find attractive investment ideas by looking at what the big boys are doing. Regulations require larger asset managers to disclose their holdings on a quarterly basis, which can provide valuable insights into potential stocks to buy.
A closely watched hedge fund manager is Bill Ackmanwho made his name making concentrated bets as head of Pershing Square Capital Management. There is one company in particular that makes up a huge weighting in the fund.
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On September 30, Ackman had 15% of his portfolio’s assets (through a combination of two share classes) in one beautiful stock. Does this mean it’s time to buy?
In early 2023, Ackman and Pershing Square began buying back shares for the first time Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). The fund initiated a position when the tech giant’s shares fell to an attractive valuation of a future price-earnings ratio (P/E). of about 16. This has historically been a cheap price to pay for what Ackman thinks is a world-class business.
He highlighted several reasons why making this investment was a no-brainer opportunity.
Alphabet is benefiting from the growth of digital advertising, thanks to its dominant presence in the market. The company’s industry-leading Google Search has an unparalleled market share. And with YouTube, Alphabet has a new opportunity to sell digital advertising. Ackman thinks more money will shift from sectors like television and print advertising to the company’s benefit.
Cloud computing is another area that will drive growth for Alphabet. As companies of all sizes see the need for more remote IT capabilities, Google Cloud has another secular tendency propelling it forward. This segment achieved annualized revenue growth of 35% last quarter and an operating margin of 17%. Ackman wouldn’t be surprised if that margin comes close to something Amazon Web Services can now boast a percentage of over 38%.
Alphabet is one of the most financially healthy companies in the world. As of September 30, it had a net cash position of $80.9 billion. It also generated $17.6 billion in free cash flow during the three-month period. This position allows management to aggressively repurchase outstanding shares.
When it comes to artificial intelligence, few companies are in a better position than Alphabet. When OpenAI was released ChatGPT about two years ago, the market initially feared that this was the beginning of the end of Google Search. “We believe these concerns underestimate Google’s structural leadership position in AI for several important reasons,” Pershing Square’s June 2023 letter reads.
