The Bill and Melinda Gates Foundation manages more than $35 billion in assets working on behalf of the philanthropic efforts of the Gates' and their friend, Warren Buffett. Our analysis of the foundation's holdings reveals that the equity portion of the portfolio has easily beaten the market.
Although showing a loss, the portfolio is only down about 5 percent year-to-date, less than half the 11.6 percent loss of the S&P 500.
The portfolio analysis also shows some overlap with Buffett's holdings, indicating that Gates hires value managers to grow his fortune.
Another striking aspect of this portfolio is that it shows an equal number of winners and losers among its 44 holdings in a declining market, quite a feat and a worthwhile goal for individual investors.
While a portfolio analysis offers general stock selection criteria, a more detailed review of the filings related to Gates' recent investments shows that his emphasis has been on looking overseas for stocks to buy.
This may be an indication of where value lies, or a strategic asset allocation decision.
Either way, it allows us to identify the first selection criteria in our hunt for stocks that may end up in the Gates Foundation portfolio:
- American Depositary Receipts (ADRs) offer U.S. investors a chance to buy overseas companies through exchanges. It's the approach Gates used for his two most recent purchases.
- A price-to-earnings ratio less than 17, which is almost 30 percent less than the fair market value P/E ratio indicated by the current interest rates and is an indicator of value.
- A P/E ratio less than the historic growth rate of the company's earnings. This criteria helps us to avoid overpaying for a stock.
- The stock's price should be performing better than at least half of all listed stocks, which indicates that the market recognizes the value of the stock and that investors are rewarding the company's performance with a higher stock price.
Using this criteria, 10 stocks look like potential Gates Foundation buys:
AstraZeneca (AZN) is a frequent name on value-based investment screens. At a recent price of 46.68, the drug maker offers a seemingly safe dividend yield of 4 percent. Analysts are optimistic that AZN will soon gain U.S. and European approval for a new diabetes treatment that has blockbuster potential.
GlaxoSmithKline (GSK) announced a 13 percent gain in earnings last quarter, and the CEO said the company would focus on increasing their presence in emerging markets where demand for new drugs is still growing rapidly. This is similar to the strategy AZN has chosen, and if successful, it will grow profits. Recently trading near 47.
Gruma (GMK) Analysts are forecasting a 25 percent increase in the stock price of this Mexican flour and tortilla distributor. With a P/E ratio of only 7, the 60-year old company seems undervalued. Recent price: 11.25.
Kyocera (KYO) is a Japanese electronics giant projected to grow earnings by 15 percent next year. The company has a U.S. subsidiary engaged in the development of solar energy. The recent price of 87 seems to be discounting this potentially lucrative business segment.
Makita (MKTAY) is a power tool manufacturer with strong brand-name recognition and solid earnings. The company has virtually no debt and an operating margin about three times higher than its competitors. At a recent price of 37.18, MKT paid investors a 2 percent dividend yield. This stock is thinly traded and investors should use limit orders to enter or exit positions.
Pohang Iron and Steel (PKX) recently traded at 126.31, providing a 2.6 percent yield in an industry with strong fundamentals. The steel maker estimates that demand in its home market of South Korea will rise by 60 percent in the next four years, while the nation's supply capacity will only increase by 30 percent over the same period.
PT Indosat (IIT) offers investors a pure play on Indonesia's economic growth. Earnings growth of 13 percent per year is expected for the next five years. The telecom provider has a P/E ratio of 16 and a dividend yield of 2.4 percent at a recent price of 36.
TDK Corporation (TDK) once dominated the cassette tape market and is now poised to be a dominant player in the DVD market, since the Blu-ray Disc format marketed by Sony has become the standard. TDK will finally reap the rewards of backing Sony technology for the past 10 years. Recently trading at 61.84.
Telkom SA (TKG) is South Africa's telephone company, one which also provides service in Nigeria. Although a risky business, the dividend yield of 4.5 percent and P/E ratio of 9 discounts a great deal of uncertainty, making this stock a great buy for value investors. Recent price: 72.86.
The9 Limited (NCTY) There are an estimated 253 million Web surfers in China, and NCTY holds the sole rights to operate role-playing online games such as "World of Warcraft" and "Audition 2" to this market. Earnings are up by 36 percent in the most recent quarter with revenue up by more than 60 percent. The P/E ratio is only 17 at a recent price of 23.20.
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