Beating the market is a goal of every growth investor. There is no better place to look for stocks that can beat the market than prominent billionaire investors who are interested in growing and protecting their wealth.
Bill Ackman of Pershing Square Capital Management and former Microsoft CEO and co-founder Bill Gates are great sources for finding promising investment ideas in the stock market. Let's take a look at two of their top holdings that could outperform the S&P 500 index for the next five years.
1. Alphabet (Google)
According to the American news agency Reuters, Bill Ackman's net worth is $9 billion. Forbes magazine. His company has delivered investors a 16% annual return over the past 20 years through the end of 2023, far outpacing the S&P 500's 10% annual return.
Ackman's company initiated a position in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) last year, and it still held a large stake in the stock, worth more than $2 billion in the first quarter. Strong growth in the digital advertising market led to a series of solid financial results that sent the stock up 26% over the past year.
The stock has recently been hit hard by the broader market sell-off and Alphabet’s loss to the government in an antitrust lawsuit. A federal court ruled that Google’s dominance in search was illegally obtained through anticompetitive behavior. It’s not yet clear what remedies Google will have, but its underlying strengths should still make it a solid investment for long-term investors.
Google has a wide competitive edge based on billions of users on its services. It has valuable data to train its artificial intelligence (AI) models. This gives the company excellent growth prospects in the $298 billion digital advertising market, according to Statista.
Another reason to like the stock is the company’s financial strength. It generated $60 billion in free cash flow on $328 billion in revenue last year. This allows the company to accelerate investments in AI infrastructure and data centers for future growth.
Nowhere is Alphabet better demonstrating the potential of its AI capabilities than at Google Cloud, where it has significant momentum. Google Cloud revenue grew 28% year-over-year in Q2. The company says more than 2 million developers are using its generative AI solutions.
Investors can now buy the stock at a much cheaper forward price-to-earnings ratio of 21. At this valuation, the stock should deliver a return in line with Wall Street's long-term earnings growth estimate of 17% per year. That should be enough to easily outperform the S&P 500 index.
2. Copy
Forbes estimates Bill Gates' net worth at $130 billion, and a large portion of Gates' fortune goes to the philanthropic efforts of the Bill and Melinda Gates Foundation. The foundation has a U.S. stock portfolio worth $45 billion at the end of the first quarter. One of its holdings is Stubborn (NYSE: CPNG)the leading e-commerce platform in South Korea, a position the foundation has held since early 2021.
Coupang follows Amazon's playbook by offering a wide range of items at competitive prices, along with a subscription service that offers fast shipping and other perks. The company's above-average growth shows it has the potential to be a monster winner for shareholders. The stock is up 20% in the past year.
Revenue has accelerated over the past year, up 30% year over year in the second quarter, excluding currency changes. Active customers grew 12% from the year-ago quarter. These are the kinds of rates that have made Amazon a highly rewarding investment for the past 20 years, and Coupang could be next.
The majority of growth is coming from existing customers, reflecting efforts to expand into non-retail services. For example, Coupang Eats is growing rapidly after integrating unlimited delivery into Coupang’s WOW membership. Additionally, Coupang’s video streaming service is gaining momentum. Growing interest in these services could lead to increased sales in the retail sector.
Coupang is expanding its selection and fulfillment capabilities. Its growing logistics infrastructure paves the way for a major opportunity for international expansion, which it is currently focusing on in Taiwan.
The Gates Foundation probably wouldn’t hold the stock if Coupang didn’t have the potential to be a very profitable company. It’s not profitable on an EPS basis, but the company generated $1.5 billion in free cash flow last year on $25 billion in trailing revenue.
The stock is trading at a reasonable price-to-free cash flow ratio of 27. Investors can expect the stock to appreciate in line with Coupang's underlying revenue and free cash flow growth over the next few years. At the current growth trajectory, that could lead to market-crushing profits.
Should You Invest $1,000 in Alphabet Now?
Before you buy Alphabet stock, here are some things to consider:
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Coupang and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Billionaire Stocks That Could Outperform the S&P 500 Over the Next 5 Years was originally published by The Motley Fool
