Philip Morris International has had a strong year, but the stock has faltered since July due to concerns about demand for the company’s smokeless Zyn products.
The tobacco company still pays a relatively high-yielding dividend.
Several billionaires bought one specific “Magnificent Seven” stock in the third quarter.
It’s understandable why retail investors might see a hedge fund making a big new investment in a company and get excited about that stock. After all, billionaire hedge fund managers are generally viewed as the best stock pickers on Wall Street, and some of them even have the track records of investment returns to back that premise up.
But retail investors must remember that, in general, they’re finding out about these trades a few months after they occur, and many hedge funds invest for short-term time horizons. That’s why retail investors must always conduct their own due diligence to make sure it still makes sense to buy a given stock.
However, if several billionaire hedge fund managers are buying or selling the same stock, it can be a clear indicator that it’s at the very least time to take a look at following their lead. In the third quarter, a number of billionaires sold their stakes in Philip Morris International(NYSE: PM) and loaded up on one “Magnificent Seven” stock.
Image source: Alphabet.
Shares of tobacco giant Philip Morris are having a strong year. They were up 27% as of Nov. 17, but the stock had been performing even better previously — it has since given up some ground since July. And the July-through-September period was when a couple of billionaires exited their stakes in the company:
Stanley Druckenmiller’s Duquesne Family Office sold all of its nearly 816,000 shares.
Philippe Laffont’s Coatue Management also completely exited its position in Philip Morris, selling nearly 1.3 million shares.
The stock’s slide began after Philip Morris released its second-quarter earnings report. Its earnings were stronger than expected, and management raised its full-year forecast. However, revenue came up short of expectations, and investors grew concerned about demand for the company’s new smokeless nicotine pouch product, Zyn. Demand was still strong, but because Zyn is viewed as the future of the longtime cigarette-focused company, investors are focused on its growth.
Investors got spooked again after Philip Morris delivered its third-quarter results in late October. Management said it had engaged in some promotions for Zyn, which led some onlookers to question how sustainable the product’s moat could be in a world filled with growing competition. Still, net revenue in the company’s smoke-free business grew 17.7% year over year in the quarter.
Investors may have grown wary of the stock’s valuation, which neared 25 times forward earnings in July. Philip Morris might still be an attractive stock for income investors, as its trailing-12-month dividend yield is close to 3.6% and its trailing-12-month free-cash-flow yield is roughly 4.2%.
Meanwhile, Coatue Management, Duquesne, and Warren Buffett’s Berkshire Hathaway initiated new positions in Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) in the third quarter. Coatue purchased nearly 2.1 million shares, Duquesne bought over 102,000 shares, and Berkshire took a stake of over 17.8 million shares, which was valued at over $4.3 billion at the end of the third quarter.
Alphabet put several significant challenges behind it earlier this year, including a Justice Department lawsuit. The federal judge overseeing that suit ruled last year that Google did indeed employ monopolistic practices in its search and online advertising businesses. The Justice Department had requested that the judge order Alphabet to divest its Google Chrome business as part of its remediation for those practices. However, the judge declined to do so, and the sentencing he ultimately imposed was a much more favorable outcome for Alphabet than most investors expected.
Furthermore, concerns over how artificial intelligence chatbots like ChatGPT might erode the traditional online search market, where Google holds a 90% share, have dissipated somewhat. Investors are becoming more confident in Google’s AI search offerings and the company’s ability to remain competitive in the space.
Given that Alphabet trades at a cheaper valuation than most of the other Magnificent Seven companies — less than 28 times forward earnings — and that it still has many strong and high-growing businesses in addition to search, if you are going to invest in a Magnificent Seven stock, I think Alphabet makes sense to consider right now.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
