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I've read a fascinating study about cloning super investors like Warren Buffett this week. If you copied Warren Buffett's top 10 holdings and rebalanced them every quarter, you could have outperformed the S&P 500 by three percentage points yearly between 2000 and 2019.
That's strong evidence that sometimes copying the right investor can be a good strategy. But not every investor is worth that much respect.
A better strategy is to find the top investors, aka super investors, and use their top holdings as a source of new stock ideas.
That's precisely what we are going to discuss in today's post. There are three stocks that 20 super investors hold the most in their top 10 portfolio holdings. I'll research them fundamentally first and then share whether adding them to our portfolios makes sense too
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks?
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There is no actual definition of super investors. They are the most prominent hedge fund managers or investors we hear from in the financial media. People follow their advice, share their quotes, or read their books and writings.
You must already know many of them. Warren Buffett sits on the top of the list as the undisputed super investor with $350B in assets, excluding the value of all the companies Berkshire Hathaway wholly owns. Howard Marks, Bill Ackman, Chuck Akre, Monish Pabrai, and Michael Burry, with a few hundred million dollars in assets under management, are some of the others on the list. Even Bill Gates is considered a super investor because of his $40B+ Bill and Melinda Gates Foundation Trust. In summary, the super investors list is the who's who of investors because they manage a lot of money, influence the funds' decisions, or are known in the media as great investors.
I went through the top 10 holdings of each super investor's portfolio reported on their quarterly 13F document as of the 30th of June 2023. The list of top 10 holdings across the 20 super investors includes more than 150 individual U.S. equities. These super investors have a limited number of stocks in common, which shows how hard it is to find the best stocks to invest in now. The most common stocks among the top-10 holdings of the 20 super investors got picked by 7 of them. The second most common stock was picked by six super investors, and the third one by four super investors. It shows that even the top 20 super investors have differing views on which stocks to buy and hold for long. And if it's so hard to agree on the best stocks to hold, the fact that some stocks got the vote of confidence of even a few still confirms those companies' strengths and quality.
Now let's talk about the top three stocks most held by super investors and research them one by one.
Number 3 - Moody's (MCO)
If you are a Buffett fan, you already know this company. He has owned and held it for a long time because of its almost monopolistic power over the credit rating market. A few posts ago, when we discussed Fitch Ratings downgrading the creditworthiness of the United States, we talked about three rating agencies owning almost the entire market, with Moody's and S&P controlling 90% of the market.
These credit agencies run a very stable business. Their market isn't growing rapidly. However, their products and services are essential to a healthy capital market. Many banks, governments, hedge funds, insurance companies, and investors use the ratings to assess all kinds of risks and make decisions to invest billions of dollars, lend money to or insure businesses, etc.
If you research Moody's fundamentals, you see relatively stable and slow revenue growth in the best of times. However, the company has a solid gross margin above 70%, indicating a real pricing power in the market. It also boasts a 25%+ net profit and solid, free-cash-flow-generating operations.
In its latest quarterly earnings call, I listened to the management's plan for the future and was very impressed with how Moody's focuses on future opportunities. It is experimenting with generative AI with Microsoft's help, leveraging its extensive database about companies, countries, properties, and global markets. It is expanding its footprint across the global market, such as Latin America. It is expanding its ratings into tokenized and digitalized bonds and assets. For example, it issued a rating for the European Investment Bank's first-ever blockchain-based bond this past quarter. These are evidence of how Moody's leadership team stays ahead of the curve and focuses on the market's needs.
Moody's is a financially solid and well-managed company—no wonder several super investors own the stock in their top holdings.
I added the stock to my 2023 Watchlist because the company is overvalued compared to its historical valuation. With more than 11 times the price-to-sales ratio and more than 43 times the price-to-earnings ratio, this is not a cheap stock by any means. The valuation has jumped above its average of 20-25 times the historical price-to-earnings ratio since the middle of 2022 without any significant jump in the earnings per share. This won't be a 10X investment, but buying it at a reasonable price can be an excellent investment for many years.
Number 2 - Microsoft (MSFT)
The next most held stock by 20 super investors in their top 10 holdings is Microsoft, ticker MSFT. Not only is Microsoft a favorite among super investors, but it is also among the top 25 holdings of nearly 400 ETFs.
Let's dig into its fundamentals and see if we should own it as those super investors do.
What a great business!
Where do the growth and cash come from? Microsoft Cloud is now a bigger and faster-growing business than the old Microsoft Office and other productivity divisions. The Azure cloud storage was up 18%, and the Cloud services business was up 27%. This is no joke. Microsoft is a $2.5 trillion company, generating double-digit revenue growth in the cloud and AI market that will get even bigger in the coming years. It's a major investor in OpenAI, the developer of the all-famous ChatGPT application, and it has already started offering generative AI cloud services to its customers, such as Moody's. The company's double-down on AI and generative AI will make the cloud business even more prominent.
On the valuation front, the stock is priced right where financial analysts expect it to be, with 35 times price-to-earnings and 12X price-to-sales ratios. Once again, just like Moody's, we have a beloved company by super investors and many other investors, which is richly priced. This again goes to my 2023 Watchlist for a chance to buy it at a better price.
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