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Bill Gates is well-known as the billionaire founder of Microsoft (NASDAQ: MSFT). He has an estimated net worth of $67 billion and is the second richest person in the world. His net worth increased by about $7 billion last year because of his investment success, according to Forbes.
Gates also has access to the greatest investor in the world through his friendship with Warren Buffett. Both billionaires have pledged to donate a significant amount of their wealth to charity and both are already acting on those promises through the Bill & Melinda Gates Foundation.
The foundation holds only 26 stocks, valued at nearly $17 billion. Almost half of the portfolio is in Buffett's Berkshire Hathaway (NYSE: BRK-B), and the top 10 holdings account for almost 90% of the portfolio.
In studying the greatest investors, I have learned that individual investors can't buy as many stocks as the billionaires own. While Gates has a relatively small number of positions, 26 stocks is still more than the typical individual investor can comfortably own.
To address this problem, I developed a trading system that tries to identify the strongest stocks in the portfolios. The process starts by reviewing SEC filings to determine what the world's best investors own. System rules then screen that list to find the two stocks that have the strongest cash flow over the past year, as well as the strongest price performance relative to the market over the past six months.
Using the list of stocks that Gates owns now, the trading system would have generated an average annual gain of 29.77% since 2006. This is 10 times the gains of the S&P 500 index, which averaged about 2.88% over that time.
In addition to delivering better returns, using this system with Gates' stocks was also less risky than the index. The worst loss was about 16% in the system, compared to more than 55% in the S&P 500.
When I applied the system rules to Gates' holdings, the two stocks at the top of the buy list now are Liberty Global (NASDAQ: LBTYA) and Toyota Motors (NYSE: TM).
Liberty Global provides video, broadband Internet and telephone services to more than 18 million residential and business customers, primarily in Europe and Chile.
Analysts expect LBTYA to report earnings per share (EPS) of $2.33 in 2013 and $3.38 in 2014, a 45% increase. The stock is trading with a price-to-earnings (P/E) ratio of 23 based on 2014 estimates. Using that growth rate, LBTYA's PEG ratio (the P/E ratio divided by the EPS growth rate) is 0.51. Analysts generally consider PEG ratios below 1.0 to be undervalued.
The chart shows a stock in a strong uptrend. A relative strength (RS) rank of 87 indicates that LBTYA has outperformed 87% of the stock market. The 26-week moving average (MA) has tracked the uptrend closely and should provide support on any pullbacks.
Recommended Trade Setup:
-- Buy LBTYA at $80 or less-- Set initial stop-loss at $67.48 and raise it as the 26-week MA trends higher-- Set price target at $100 for a potential 25% gain in 6-12 months
The second Gates stock on the buy list is Toyota. The auto company is expected to grow EPS at about 45% a year over the next five years, yet has a P/E ratio of 13 based on expected 2014 earnings. The PEG ratio is 0.29, less than a third of what would be considered fair value.
The chart pattern for TM is similar to LBTYA with high RS and the 26-week MA providing a stop-loss level.
-- Buy TM at $122 or less-- Set initial stop-loss at $100 and raise it as the 26-week MA moves up-- Set price target at $144 for a potential 18% gain in 6-12 months
With billions of dollars to manage and a track record of success, Bill Gates is an investor worth following. Screening for his two best holdings makes it possible to benefit from his stock picking skills.
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