The Bill and Melinda Gates Foundation’s Stock Picks

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The Bill and Melinda Gates Foundation Trust invests its capital to sustain its various philanthropic activities. It is one of the investors Insider Monkey tracks in our database of quarterly 13F filings, which we use to help us develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year).

Even though its most recent 13F filing discloses many of its long equity positions from the end of March, the trust actually hadn’t changed most of these positions during the first quarter of 2013 and so, we would assume that it still owns quite a bit of what had been its largest holdings at that time. Read on for our quick take on its top five picks or check out the full list of stocks the trust reported owning.

Betting on Buffett

The trust, which is managed by Michael Larson, reported a position of almost 81 million Class B shares of Berkshire Hathaway. Gates and Berkshire head Warren Buffett have bonded on a number of topics and issues, and apparently, the trust is a strong believer that both Buffett and his hand-picked successors will prove able enough to identify attractive investment opportunities over the long-term (find Buffett's favorite stocks). In addition to the succession at Berkshire Hathaway, however, investors may also be concerned with the premium P/B ratio of 1.5.

Four more of the trust’s top picks

Larson and his team didn’t just own Berkshire, they’ve also copied one of Buffett’s long-term favorite stock picks, Coca-Cola (NYSE: KO), with about 34 million shares in their portfolio. While Coca-Cola is a somewhat popular defensive stock, with a beta of 0.3 and a dividend yield of 2.7%, its business has been struggling going by recent reports. At a valuation of 21 times trailing earnings, markets are pricing in quite a bit of future earnings growth and so, given this recent financial performance, it doesn’t seem like a good buy right now.

Latin American Coca-Cola bottler and distributor Coca-Cola FEMSA (NYSE: KOF) was another of the foundation’s top picks, with the filing disclosing ownership of 6.2 million shares. Coca-Cola FEMSA is even less sensitive to the broader economy than its related company, with a beta of only 0.1. However, it too carries something of a premium valuation, with trailing and forward earnings multiples of 28 and 22, respectively. As with Coca-Cola itself, recent performance has not been in line with the market's expectations with earnings declining in its last quarterly report compared to Q1 2012.

According to the 13F, the trust owned 9.9 million shares of McDonald’s (NYSE: MCD) at the beginning of April of this year. The market leader in quick service restaurants trades at a small discount to most of its peers with a trailing P/E of 19. McDonald's, however, has more limited growth prospects than many of its peers and has seen very little change in either sales or net income according to recent reports. And while that valuation is low for the industry, it certainly would not be considered value territory on an absolute basis.

Another troubled company among the Gates Foundation’s stock picks is equipment company Caterpillar (NYSE: CAT). Famed short seller Jim Chanos recently recommended it as a short because of the company’s exposure to mining equipment capital expenditures, claiming that the mining boom is coming to an end and that capex in the industry will collapse. Caterpillar has, in fact, been witnessing a decline in both revenue and earnings from levels a year ago, and with a trailing P/E of 12, the market -- for better or for worse -- seems to expect flat performance going forward.

Conclusion

Perhaps, these stocks were good long-term picks when the trust bought them, and perhaps, they will turn around over a period of several years, but right now, they generally don’t seem attractive given recent results. The consumer stocks feature high earnings multiples and flat results, while investors could certainly have concerns about Caterpillar’s ability to sustain current results. Berkshire may be bid up above attractive prices as well, in addition to uncertainty regarding the skill of the holding company’s future management.

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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 recommends Coca-Cola and McDonald's. The Motley Fool owns shares of McDonald's. 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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