Billionaire Chris Hohn’s Top 5 Stock Picks

2. Alphabet Inc. (NASDAQ: GOOG)

Ranking 2nd on the list of Chris Hohn’s top 10 stock picks is Alphabet Incorporated. Hohn’s stock-picking technique paid off as Alphabet is up a  stunning 55.35% in the past 12 months.

With a $5.2 billion stake in Alphabet Inc., Chris Hohn’s TCI Fund Management owns 2.95 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 157 hedge funds held stakes in GOOG at the end of the fourth quarter, versus 150 funds at the end of the third quarter.

Kinsman Oak Capital Partners, in their Q4 2020 Investor Letter, said that they have a controversial view on Alphabet Inc. (NASDAQ: GOOG) because they view it as a ‘not so expensive’ company.

Here is what Kinsman Oak Capital Partners has to say about Alphabet Inc. in their Q4 2020 investor letter:

“Our view on Alphabet (GOOG) may be somewhat controversial. The bear case for GOOG boils down to antitrust risk and valuation. Our thesis is predicated on the belief that real earnings power, especially for Alphabet, is higher than it appears on the surface. At first glance, Alphabet’s P/E appears to be 30.2x. Adjusting for net cash brings this down to 27.9x. Alphabet’s “Other Bets” segment generates de minimis revenues but reduces operating income by 13%. Adjusting for that (and assigning zero value to a segment that includes Waymo, Nest, and Verily) brings the multiple to 24.7x versus the S&P 500 trading at 22.3x.

Alphabet, at a 10% premium to the S&P 500, is one of the biggest relative value bargains hiding in plain sight we have seen. Alphabet has a much deeper moat, better margin profile, less capex requirements, and faster growth profile than the average company within the index (estimated 18% CAGR for the next two years versus 8% for the S&P 500).

Pushing the envelope, Alphabet’s multiple would be lower than the overall market if the company treated stock-based compensation as dilution and/or if research & development was capitalized instead of expensed. Internally we use a more detailed sum-of-the-parts analysis to more closely approximate intrinsic value. Further, Waymo provides significant upside optionality, especially if you believe Tesla’s “full self driving” technology justifies a large portion of its market cap.

In short, we believe the obfuscated earnings power makes Alphabet appears more expensive than it really is. After adjusting for factors like “Other Bets” in Alphabet’s case or net cash, stock-based compensation, and research and development treatment, it becomes clear that investors are being adequately compensated for the associated antitrust and regulatory risk.”