The Bill and Melinda Gates Foundation’s Low P/E Stock Picks

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In May, the Bill and Melinda Gates Foundation Trust filed its 13F with the SEC for the first quarter of 2013, disclosing many of its long equity positions as of the end of March. At Insider Monkey, we track 13Fs from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year).

We can also screen individual filings for stocks satisfying a number of criteria; while the trust’s filing is quite old, it is a long-term investor which tends to make little change to its positions over the course of a quarter. Here are four stocks which the trust owned at least $300 million of at the end of the First Quarter (Q1) and which have both trailing and forward earnings multiples of 15 or lower (or see the full list of the trust's stock picks).

Oil majors

Oil majors are generally cheap in earnings terms, and Exxon Mobil (NYSE: XOM), one of the trust’s stock picks, is no exception, valued at 12 times forward earnings estimates. The integrated oil and gas company, one of the largest U.S companies by market capitalization, experienced a significant decline in revenue in its most recent quarter compared to the same period in the previous year. While Exxon Mobil managed to hold its profits steady thanks to higher net margins, investors should look into how sustainable that source of earnings might be (though with oil prices high revenue may rise again in any case).

Larson and his team disclosed ownership of 7.1 million shares of BP (NYSE: BP) as of the beginning of April. Market sentiment on BP is still poor, as shown by the fact that it is valued at a discount to many of its peers, For example, the forward earnings multiple is 8. The company has been selling off many of its assets, which has the potential to allow management to become more focused on the core business (though of course the oil and gas market will remain the primary driver of profitability). Income investors should note the dividend yield of over 5%.

Two more cheap stock picks from the trust

The trust, which is managed by Michael Larson and his team, reported owning more than 10 million shares of Caterpillar (NYSE: CAT). While in terms of trailing earnings Caterpillar does appear cheap at a P/E multiple of 11, concerns have recently been growing regarding the company’s exposure to capital expenditures by the global mining and commodities industry. With Chinese growth appearing to slow, famed short seller Jim Chanos recently argued at the Delivering Alpha conference, the era of growth in commodity demand may be ending which would- according to Chanos- lead to a steep fall in demand for Caterpillar’s mining equipment. The company recently reported a 16% decline in revenue in the second quarter of 2013 versus a year earlier, with the mining equipment segment leading the decline. Consolidated operating profits fell by over 40%. As a result, investors should be skeptical that Caterpillar is in fact a value stock and quite concerned that earnings may in fact decline sharply as the mining industry adjusts.

Wal-Mart (NYSE: WMT) is another stock which the Gates Foundation likes (with over 11 million shares in its portfolio as of the most recent filing) and which has at least moderately low earnings multiples with trailing and forward Price/Earning (P/E) multiples of 15 and 13 respectively. After the discount retailer reportedly got off to a poor start in the current fiscal year (Wal-Mart’s fiscal year ends in late January), it managed to at least grow revenue and net income by 1% from their levels a year ago. Some analysts have argued that the U.S. lower middle class, which is Wal-Mart’s core customer base, will continue to struggle economically and therefore the retailer does not have good prospects. In addition, Wal-Mart has to confront growing competition from dollar stores and online retailers. Warren Buffett’s holding company Berkshire Hathaway also likes Wal-Mart, reporting a position of more than 49 million shares in its most recent 13F (find Buffett's favorite stocks).

Conclusion

The oil majors are somewhat appealing from a value perspective, and as has been mentioned BP does offer a high yield for dividend investors willing to take on the related commodity risk. Wal-Mart is troubled, but it’s possible that last quarter was particularly bad for reasons unrelated to macro conditions and so investors should wait for more results before drawing any firm conclusions. As for Caterpillar, it does seem like the stock should be avoided- despite the low valuation metrics- on concerns about mining capital expenditures.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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