Since the end of the Great Recession, growth stocks have crushed value stocks. Precipitously low interest rates and a dovish Fed have encouraged fast-paced companies to borrow at cheap rates in order to hire, innovate, and expand.
But this pattern may be nearing an inflection point. Historically, value stocks have outpaced growth stocks over the very long term. Further, there's been a clear-cut outperformance seen in value stocks during the early stages of an economic recovery. This historic outperformance doesn't seem to be going unnoticed by the world's most successful investors.
During the fourth quarter, billionaire money managers piled into four well-known value stocks.
Image source: Getty Images.
Verizon
According to WhaleWisdom.com, which aggregates Form 13F filings from institutional investors and hedge funds, telecom giant Verizon (VZ 1.08%) was a popular play among successful money managers. Even though the total number of shares held by 13F filers rose by less than 2% in the fourth quarter from the sequential third quarter, the number of new positions opened in Q4 was up 154% from Q3.
In particular, Warren Buffett's Berkshire Hathaway opened a 146.7 million share position in the company, with Jeff Yass's Susquehanna International upping its existing stake by almost 1.9 million shares.
The "buy Verizon" thesis looks to have two catalysts on Wall Street. First, there's the ongoing rollout of 5G networks across the United States. It's been a decade since wireless download speeds were upgraded, which should create an incredible amount of pent-up demand from consumers and enterprises to upgrade their devices. Since data is a significant driver of Verizon's wireless margins, 5G should represent a multiyear shot in the arm of organic growth.
The other factor at play here is Verizon's safety in numbers. The company is lugging around $31 billion less in total debt than chief rival AT&T, and its low beta suggests it's highly resistant to wild swings in the market. With Treasury yields not necessarily topping the inflation rate, money managers might be turning to Verizon to generate a return on their cash, with its rock-solid 4.5% yield.
Image source: Getty Images.
Bristol Myers Squibb
Billionaire money managers also seem pretty enthused about the long-term prospects for pharmaceutical stock Bristol Myers Squibb (BMY +2.70%), which can be purchased at the moment for less than eight times forward-year (2022) earnings per share.
Similar to Verizon, ownership by 13F filers didn't increase much in the fourth quarter from the sequential third quarter. However, the number of new positions opened in Q4 jumped 92% form Q3 2020. Buffett's Berkshire Hathaway added almost 3.4 million shares to its existing position, while Larry Fink's BlackRock bolstered its stake by over 10 million shares.
The biggest near-term catalyst for Bristol Myers is the closure of its Celgene acquisition in November 2019. Celgene had built up an impressive portfolio of cancer and immunology drugs, with multiple myeloma treatment Revlimid sitting at the top of the pack.
Last year, Revlimid brought in $12.1 billion in net sales and has grown by a double-digit percentage on an annual basis for more than a decade. Revlimid benefits from early cancer detection, longer duration of use, label expansion opportunities, and strong pricing power. This veritable cash cow for Bristol Myers Squibb is protected from an onslaught of generic competition for almost another five years.
Bristol Myers' long-term growth rests with the likes of Eliquis and Opdivo. The former, which was developed in collaboration with Pfizer, has become the undisputed leading oral anticoagulant. Meanwhile, cancer immunotherapy Opdivo generated a solid $7 billion in net sales in 2020. With Opdivo being examined in dozens of clinical trials as a monotherapy or combination treatment, there's a very good chance it'll benefit from future label expansions.
Image source: IBM.
IBM
Though this might come as a bit of a shock to some investors, billionaire money managers can't stop buying tech stock IBM (IBM +0.33%). Between Q3 2020 and Q4 2020, WhaleWisdom's data shows that the number of new positions started by 13F filers more than doubled.
BlackRock increased its nearly 7% ownership stake in IBM by adding more than 1.3 million shares during the fourth quarter. Meanwhile, John Overdeck and David Siegel's Two Sigma Investments dramatically increased its position in IBM by purchasing just over 1.4 million shares.
The biggest issue for IBM over the past decade has been that it waited too long to push into cloud computing. Its tardy entrance into the cloud has left it reliant on its legacy software solutions, which has led to a near-precipitous sales decline over the past seven years. Thankfully, through a combination of organic growth, aggressive bolt-on acquisitions, and a clear focus on hybrid-cloud solutions, IBM's transformation is beginning to take shape.
In 2020, total cloud revenue jumped 19% to $25.1 billion, which represents 34% of total sales. As higher-margin hybrid-cloud solutions become a larger percentage of total sales, IBM's operating cash flow should significantly improve.
IBM also doesn't receive enough credit for sustaining the cash flow from its legacy operations. Mindful cost-cutting from its legacy software solutions has helped to maintain or even boost operating margins over time. This is providing more cash flow for IBM to repurchase its stock, pay its 5.1% annual dividend, make bolt-on acquisitions, and innovate.
The all-electric 2022 Chevrolet Bolt. Image source: General Motors.
General Motors
Finally, billionaires have been stomping on the gas pedal and piling into auto stock General Motors (GM +0.05%). To keep with the theme, General Motors' overall ownership among 13F filers increased only marginally in Q4 2020. However, the number of new positions opened by 13F filers skyrocketed 135% from Q3 2020.
The most noteworthy additions came from billionaires Ken Griffin and Israel Englander. Griffin's Citadel Advisors essentially quadrupled its position by purchasing 4 million shares, while Englander's Millennium Management significantly increased its stake in GM by a little over 2.3 million shares.
It's no secret that the biggest catalyst for GM is electric vehicles (EV) and autonomous vehicles (AV). The Detroit automaker is making a whopping $27 billion investment into EVs and AVs between 2020 and 2025, with the intention of bringing 30 new EVs to market globally by 2025. General Motors has the infrastructure needed to make this shift to clean-energy vehicles happen, along with a rich history behind its brand that's liable to boost sales.
What's more, auto stocks have historically been valued at price-to-earnings ratios that are well below the average for the benchmark S&P 500. Even now, investors can buy into GM for less than 10 times forward-year (2022) earnings per share. But if EV sales do take off, the entire auto industry, including GM, would be expected to see a major uptick in sales growth. Billionaires may be realizing that price-to-earnings discounts for established auto manufacturers no longer make sense.
