Philip Morris International has had a good year, but the stock has fallen since July on concerns about demand for the company’s smoke-free Zyn products.
The tobacco company still pays a relatively high dividend.
Several billionaires bought a specific stock of the “Magnificent Seven” in the third quarter.
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It’s understandable that retail investors see a hedge fund make a large new investment in a company and get excited about the action. After all, billionaire hedge fund managers are generally considered the best stock pickers on Wall Street, and some of them even have a track record of investment returns to back that assumption up.
But retail investors should remember that they typically discover these trades a few months after they occur, and that many hedge funds invest over short-term time horizons. That’s why retail investors should always do their due diligence to make sure it still makes sense to buy a given stock.
However, if multiple billionaire hedge fund managers are buying or selling the same stock, that can be a clear indicator that it’s at least time to consider following their lead. In the third quarter, a number of billionaires sold their stakes in Philip Morris International(NYSE:PM) and loaded onto a “Magnificent Seven” stock.
Image source: Alphabet.
Shares of tobacco giant Philip Morris are having a good year. They were up 27% as of November 17, but the stock had performed even better before that – it has since lost ground since July. And between July and September, a few billionaires gave up 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 sold its position in Philip Morris by selling nearly 1.3 million shares.
The stock’s slide began after Philip Morris released its second-quarter earnings report. Its profits were higher than expected and management raised its guidance for the full year. However, revenue fell short of expectations and investors became concerned about demand for the company’s new smokeless nicotine pouch product, Zyn. Demand was still strong, but because Zyn is seen as the future of the long-running cigarette-focused company, investors are focused on its growth.
Investors were spooked again after Philip Morris reported its third-quarter results in late October. Management said it had engaged in some promotions for Zyn, leading some observers to question how sustainable the product’s moat might be in a world of increasing competition. Nonetheless, net revenue from the company’s smoke-free business increased 17.7% year-over-year during the quarter.
Investors may be wary of the stock’s valuation, which approached 25 times forward earnings in July. Philip Morris could 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 around 4.2%.
Meanwhile, Coatue Management, Duquesne and Warren Buffett’s Berkshire Hathaway initiated new positions in Alphabet(NASDAQ:GOOG)(NASDAQ:GOOGL) in the third trimester. Coatue purchased nearly 2.1 million shares, Duquesne purchased more than 102,000 shares and Berkshire took a stake of more than 17.8 million shares, valued at more than $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 online search and advertising businesses. The Justice Department had asked the judge to order Alphabet to divest its Google Chrome business as part of its corrective measures against these practices. However, the judge refused to do so, and the sentence he ultimately imposed turned out to be much more favorable to Alphabet than most investors expected.
Additionally, concerns about how AI chatbots like ChatGPT could erode the traditional online search market, where Google has a 90% share, have dissipated somewhat. Investors are increasingly confident in Google’s AI search offerings and the company’s ability to remain competitive in this space.
Given that Alphabet trades at a lower valuation than most other Magnificent Seven companies – less than 28 times forward earnings – and still has many strong, high-growth businesses in addition to research, if you’re considering investing 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 holds positions and recommends Alphabet and Berkshire Hathaway. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
Billionaires sell Philip Morris International, load the boat on this headline “Magnificent Seven” was originally published by The Motley Fool
