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The average investor can find compelling investment ideas by looking at what the big boys are doing. Regulations require larger asset managers to disclose their holdings every quarter, which can provide valuable insights into potential stocks to buy.
One closely watched hedge fund manager is Bill Ackman, who has made a name for himself by making concentrated bets as the head of Pershing Square Capital Management. There’s one business in particular that makes up a huge weighting in the fund.
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As of Sept. 30, Ackman had 15% of its portfolio’s assets (via a combination of two classes of shares) in one magnificent stock. Does this mean it’s time for you to buy?
In early 2023, Ackman and Pershing Square first started buying stock in Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). The fund initiated a position when the tech giant’s shares fell to an attractive valuation of a forward price-to-earnings (P/E) ratio of around 16. This was a historically cheap price to pay for what Ackman thinks is a world-class enterprise.
He highlighted several reasons for why making this investment was a no-brainer opportunity.
Alphabet benefits from the growth of digital advertising, with its dominant presence in the market. The company’s industry-leading Google Search has unrivaled market share. And with YouTube, Alphabet has another avenue to sell digital advertising. Ackman thinks more money will move over from areas like TV and print ads to the company’s advantage.
Cloud computing is another area that will drive growth for Alphabet. As businesses of all sizes see the need for greater off-premises IT capabilities, Google Cloud has another secular trend propelling it. This segment posted 35% year-over-year revenue growth and a 17% operating margin last quarter. Ackman wouldn’t be surprised to see that margin start to approach what Amazon Web Services boasts, which is now over 38%.
Alphabet is one of the most financially sound companies on the face of the planet. As of Sept. 30, it had a net cash position of $80.9 billion. It also raked in $17.6 billion of free cash flow during the three-month period. This position allows management to aggressively buy back outstanding shares.
When it comes to artificial intelligence, very few businesses are in a better position than Alphabet. When OpenAI released ChatGPT about two years ago, the market initially was worried that it was the beginning of the end of Google Search. “We believe these concerns underestimate Google’s structural leadership position in AI for several key reasons,” Pershing Square’s June 2023 letter reads.
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