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Following “smart money” can be an effective investment strategy. Billionaires tend to hire people who are good at managing money, and they often have an information advantage.
That’s not to say that the super-rich are clairvoyant or rarely make the same mistakes that can affect other people. Nevertheless, it’s generally wise to listen when billionaires are sending clear signals, such as the ones outlined below.
Hedge fund trading data is a useful starting point
Hedge funds enjoy many advantages in investing with billionaires, many of whom manage their assets. goldman sachs Publishes reports on key trends in hedge fund holdings and trades. This is data that helps sophisticated investors and the ultra-high net worth determine how they think about the market and the economy as a whole.
Hedge funds have been buying up hot big-cap tech stocks last year, and their exposure to the Magnificent Seven hit an all-time high. Unsurprisingly, this coincided with significant outperformance for these stocks. Capitalization-weighted tech ETFs have crushed equal-weight and total market index funds since early 2023.
For those who don’t know, in a market-cap weighted fund, each underlying stock’s contribution to the fund’s total value is determined by the stock’s market capitalization relative to the sum of the market caps of all component stocks in the fund. . for example, SPDR S&P 500 ETF Trust, microsoft With a market capitalization of $3.1 trillion, it contributes nearly 7.1% of the total fund value. This represents, as you might expect, nearly 7.04% of his total market capitalization of approximately $44 trillion in underlying stocks. (The S&P 500 is only rebalanced on a quarterly basis, so percentages may not always match.)
The chart below shows how tech ETFs outperformed common ETFs.of Technology Select Sector SPDR ETF, Invesco QQQ Trustand the Vanguard Information Technology ETFboth have returned more than 60% since the beginning of 2023, while the more diversified SPDR S&P 500 ETF and Invesco S&P 500 Equal Weight ETF have returned 34% and 17%, respectively, over the same period. ing.
The billionaires likely recognized the unique combination of quality, stability and growth offered by tech giants amid uncertain macroeconomic conditions around the world. Latest data from Goldman Sachs suggests that wealthy investors are taking profits and selling positions in the following stocks: microsoft, alphabet, appleand Nvidia.
These portfolio adjustments do not indicate a lack of confidence in the Magnificent Seven, and even as they reduce their positions, hedge funds’ exposure remains high. Rather, this is a reaction to the shifting balance between risk and reward as some of these stocks delivered huge profits on their way to all-time highs.
Savvy investors are cashing out some of their positions and looking for the next big market move among stocks with more attractive valuations.
Amazon (NASDAQ:AMZN) Hedge funds and billionaires have disproportionately increased their contact with e-commerce leaders, making them notable outliers from this trend. Amazon is now among the top 10 holdings of about 100 hedge funds, ahead of Microsoft, Alphabet, Nvidia and Meta, according to a Goldman report. Investors are likely focused on the company’s relatively attractive valuation, as the stock has lagged significantly behind some of its peers over the last year.
Considering what we know about recent hedge fund trading, it’s no surprise that Amazon stock is up 15% since the beginning of the year, outperforming the stock. Nasdaq Composite That’s a difference of about 8 percentage points.
Why you need to look at Amazon
Investors may have gotten carried away by the AI boom last year, but it’s always important not to lose sight of business fundamentals. Amazon dominates the fragmented e-commerce industry with nearly 50% market share in the US. The next closest rival is walmartaccounting for less than 10% of online retail purchases.
In the future, we may see inroads from niche players such as: Shopifywith the ongoing digital shift by more traditional retailers.
But overcoming Amazon’s formidable economic moat will require a fundamental shift. The company’s massive scale, superior technology and logistics enable it to offer unparalleled pricing and customer service.
Amazon Web Services (AWS) also leads in cloud infrastructure services with a 31% share. Microsoft is closing the gap, but Amazon is expected to become a major player in the market for the foreseeable future. This market is expected to grow by more than 15% annually, making this a key driver of growth and cash flow.
Amazon delivered a rather quiet 14% revenue growth in its most recent quarter, with a good balance between its North American and international markets. He also recorded nearly 40% growth in the AWS segment. Despite all the concerns about the company’s growth and consumer strength, the company continues to produce positive results.
The stock’s expected price-to-earnings ratio (PE) is around 40 times, which seems a bit high, but its price-to-cash flow ratio (P/CF) is less than 20 times. There is a large discrepancy with accounting profits. Cash flow increases due to significant non-cash depreciation, amortization, and stock-based compensation expense recognized in the income statement under Generally Accepted Accounting Principles (GAAP). GAAP profits should not be ignored. This methodology exists for a good reason, but it obscures the true amount of cash that Amazon generates each quarter.
Amazon has sustainable competitive advantages, can grow much faster than the broader economy, is a cash flow powerhouse, and can get all of this at a reasonable valuation. Billionaires are aware of these important factors, and individual investors should consider their benefits as well.
Should you invest $1,000 in Amazon right now?
Before buying stocks on Amazon, consider the following:
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Ryan Downie has held positions at Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Goldman Sachs Group, Microsoft, Nvidia, Shopify, and Walmart. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
Originally published by The Motley Fool: Years from now, you might wish you had followed the billionaire investor in this stock
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