There's an old saying that "success begets success." Exceptions certainly exist, but there's truth in the idea that it pays to be familiar with the rationales, methodologies, and actions of those who are consistently performing at a high level.
That's not to say that you should blindly replicate the moves of famous investors, but their choices can be instructive when it comes to navigating the market and putting your money to work in an effective way. Here's why Under Armour Inc. (NYSE: UAA) (NYSE: UA), Electronic Arts (NASDAQ: EA), and Apple (NASDAQ: AAPL) are being bought by some of the world's most highly regarded investors.
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Buffett keeps going back for more Apple
Keith Noonan (Apple): Warren Buffett's love of Apple stock has received plenty of publicity -- and for good reason. He doesn't often make a big play in the tech sector, but Apple has qualities that fit the Buffett model.
For one, the company has stellar brand strength -- a characteristic that's allowed it to soak up the large majority of mobile hardware profits over the last decade. Canaccord Genuity estimates that it captured 87% of smartphone profits in the December-ended quarter.
The brand advantage has also extended to the software space, with the company attracting a customer base that has much higher per capita spending compared to Android users. Momentum for Apple software and App Store spending propelled sales for its services segment up 18% year over year and looks poised to continue.
Apple's consistent earnings-growth engine means that the stock is valued at just 15 times forward earnings despite the company's share price having nearly tripled over the last five years. Apple is also an income generator -- another quality that's prized by Berkshire Hathaway. The stock's yield sits at roughly 1.4% -- hardly the biggest in tech town but also nothing to sneeze at in light of a five-year history of annual dividend growth, a payout ratio of just 22%, and recent tax reforms paving the way to repatriate its roughly $250 billion in overseas cash at a substantially lower rate.
Berkshire purchased another 31.2 million shares in the December-ended quarter, bringing its total share count north of 165 million and making Apple the company's largest holding. That's quite the distinction, but it also wouldn't be surprising to see Buffett go back for another bite of Apple stock.
Betting on a turnaround
Jason Hall (Under Armour): Over its history, D.E. Shaw has generated billions in profits for its investors. And while D.E. Shaw himself no longer runs the day-to-day operations of the fund he founded, it still uses computational methods in addition to fundamental research he helped pioneer. One stock the fund recently invested in that I think is worth a look is Under Armour Inc., over 2 million shares of which D.E. Shaw bought in the fourth quarter.
I won't attempt to analyze why D.E. Shaw's managers invested in the stock, but I think it was an excellent time to do it, if you're willing to ride out some uncertainty and expect -- as I do -- that the company's ongoing strategic refocusing will pay off.
There's evidence that it already is starting to work out. When the company reported fourth-quarter 2017 earnings in February, it gave investors good news, with sales up 5% on a global basis, after having reported a stunning 5% decline in the third quarter. Sales continued to drop in North America, but the company has begun stemming the losses, while continuing to generate huge international growth. With international sales still only 25% of the total, weakness at some will remain a challenge, but the future will be heavily tied to continuing its overseas growth.
As the company works its way through 2018, there are still cost-cutting efforts underway that will hurt the bottom line this year. But by 2019, management expects its restructuring over 2017 and 2018 to deliver big improvements to the bottom line, particularly as sales continue to trend better.
Daniel Miller (Electronic Arts): Electronic Arts is a global leader in developing and delivering games and content for consoles, mobile devices and personal computers, and despite some bad press surrounding its microtransaction strategies in Battlefront II, some of the world's best investors are still buying shares. In fact, Steve Cohen, manager of the Point72 Asset Management fund, upped his stake in EA by 65% during the fourth quarter of 2017 and it's now the fund's fifth-largest holding.
The video game industry has evolved rapidly alongside the development of digital distribution, downloadable content, and microtransactions. Those factors have helped Electronic Arts boost its margins and bottom line, and aren't likely to reverse anytime soon, if ever. In fact, EA's digital net bookings for the trailing 12 months ending with the fiscal third-quarter 2018 was a record $3.375 billion, an 18% increase over the prior period and represented a staggering 67% of total net bookings over that time span.
The other evolution in the game industry has been the rise of esports, which is essentially professional and highly competitive gaming. EA is positioned to make a continued splash into esports through its Madden, FIFA, and Battlefield titles. In fact, The Madden Challenge entertainment special on The CW Network was the No. 1 esports television broadcast in the U.S. in 2017, according to the company.
One interesting takeaway from the third-quarter conference call was management noting it would reevaluate its capital return strategy. With increasing margins and cash, to some investors that announcement meant EA could be issuing a dividend. The video game industry has a capital-light business model, and EA has a strong balance sheet. A possible dividend is just one more reason some of the world's best investors are buying EA shares right now.
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Daniel Miller has no position in any of the stocks mentioned. Jason Hall owns shares of Apple, Under Armour (A Shares), and Under Armour (C Shares). Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.