Philip Morris International has had a strong year, but the stock has suffered since July on concerns about demand for the company’s Zyn non-smoking products.
The tobacco company still pays a relatively high dividend.
Several billionaires bought one specific “Magnificent Seven” stock in the third quarter.
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It’s understandable why retail investors might see a hedge fund make a big new investment in a company and bet on that stock. After all, billionaire hedge fund managers are generally considered the best stock pickers on Wall Street, and some of them even have the investment returns to back up that premise.
But retail investors should remember that, in general, they are finding out about these businesses a few months after they happen, and many hedge funds invest for short-term time horizons. This is why retail investors should always perform their own due diligence to ensure that it still makes sense to buy a particular stock.
However, if several billionaire hedge fund managers are buying or selling the same stock, it can be a clear indicator that it is at least time to take a look at how they follow their lead. In the third quarter, a number of billionaires sold their shares Philip Morris International(NYSE:PM) and loaded on one “Magnificent Seven” stock.
Image source: Alphabet.
Shares in tobacco giant Philip Morris are having a strong year. They’re up 27% since Nov. 17, but the stock was doing even better before — it’s since given up some ground since July. And the period from July to September was when a couple of billionaires got out of their shares in the company:
Stanley Druckenmiller’s Duquesne Family Office sold nearly all of its 816,000 shares.
Philippe Laffont’s Coatue Management also fully 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 forecast for the full year. However, revenue came in below 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 seen as the future of the cigarette-focused company for a long time, investors are focused on its growth.
Investors were disappointed again after Philip Morris gave its third quarter results at the end of October. Management said it has been involved in some promotions for Zyn, which has led some onlookers to question how sustainable the product moat can be in a world filled with increasing competition. Still, net income in the company’s smokeless business grew 17.7% year over year in the quarter.
Investors may have grown wary of the stock’s valuation, which reached 25 times forward earnings in July. Philip Morris may 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 started new positions in Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) in the third quarter. Coatue bought nearly 2.1 million shares, Duquesne bought more than 102,000 shares, and Berkshire took a stake of more than 17.8 million shares, which was 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 case 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 remedy for those practices. However, the judge refused to do so, and the sentence he ultimately imposed was a much more favorable result for Alphabet than most investors expected.
In addition, concerns about how artificial intelligence chatbots like ChatGPT could take away the traditional online search market, where Google has 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 other Magnificent Seven companies — less than 28 times forward earnings — and that it still has many strong, high-growth businesses besides search, if you’re going to invest in 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.
Billionaires are selling Philip Morris International and piling on this “Magnificent Seven” stock was originally published by The Motley Fool
