We recently compiled a list of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb and in this article we will discuss the activist investor’s position in Danaher Corporation (NYSE:DHR).
Billionaire investor Dan Loeb’s hedge fund Third Point had a strong start to 2024 after its offshore fund posted returns of 7.8% in the first quarter chugging along with the broader market’s 10.6% gain. AI has been one of his top investing themes for some time now and the activist shareholder maintains his bullish view on the technology. In the first quarter, he initiated a position in Alphabet and also increased his position in Amazon by 22% to about $920 million.
Loeb Thinks Vistra’s Capital Allocation Strategy is “Brilliant”
Loeb’s also bullish on the energy transition and one of his favorite stocks that is expected to benefit from the AI-driven electricity demand is Vistra, one of the largest independent power producers and retail electricity providers in the US. Though Vistra’s core markets have experienced volatility due to weak domestic electricity demand, the power company’s “capital allocation strategy has been brilliant”, he stated in his Q1 2024 letter to shareholders, seen by Insider Monkey. In the weak demand environment for fossil fuels, Vistra made smart moves by shutting down its unprofitable coal plants and instead buying back 33% of its shares between 2018 and 2023. Additionally, its acquisition of nuclear generation assets of Ohio-based energy company, Energy Harbor, was right on time as governments are turning to nuclear fuel sources to meet the world’s growing energy demands. Loeb expects Vistra to be a direct beneficiary of AI-driven electricity demand and is bullish on the company’s unique position of holding both renewable and fossil fuel-based assets under its belt.
Loeb’s Bullish on LSEG, and For Good Reason
Another AI play Loeb is increasingly bullish on is UK-based stock exchange and financial data company London Stock Exchange Group. The activist investor likes the company’s unique market position as a data provider that is democratizing and making financial data accessible to consumers without the use of additional third-party software. He sees London Stock Exchange Group benefitting from generative AI as information retrieval systems in financial services become more powerful. He also expects the company to develop “a powerful Research Assistant application” with Microsoft to reduce both human resources and time needed to process financial data. He thinks London Stock Exchange Group is at the forefront of capitalizing on the transition of the financial services industry “from manual data processing via clunky desktop terminals to machine-assisted data processing”.
Scientist in a lab working on a research project, focusing on biotechnology and healthcare advancements.
Our Methodology
We scanned Third Point’s Q1 portfolio and picked growth stocks from the fund’s top 13F holdings. Additionally, we’ve also added overall hedge fund sentiment, as of Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Note: All pricing data is as of June 6.
Dan Loeb Likes this Growth Stock
Danaher Corporation (NYSE:DHR)
Third Point’s Stake Value: $511,926,000
Number of Hedge Fund Holders: 98
Another one of Dan Loeb’s top growth stock picks is Danaher Corporation (NYSE:DHR). The stock accounts for 6.5% of Third Point’s Q1 2024 portfolio. Danaher Corporation (NYSE:DHR) is a diversified conglomerate that manufactures and markets medical, industrial, and commercial products and services across the globe. The company operates through three segments: Biotechnology, Life Sciences, and Diagnostics. DHR is among Dan Loeb’s longest held positions and here’s what the activist investor had to say about the company in his Q2 2023 investor letter:
“Danaher has created significant value over decades through its unique operating system and superior M&A, and its low leverage balance sheet should allow it to take advantage of depressed valuations in the life science tools sector to continue to add to its portfolio. More importantly, Danaher stands to benefit from the surge in new projects and drug discovery spending occurring in the post-Covid world. Danaher’s Biotechnology and Life Sciences segments are poised to accelerate from data analytics and computational biology, which will grow meaningfully as AI and eventually quantum computing technology advance. We would not be surprised to see Danaher’s growth rate move from high single digits to the low teens over time, implying a long runway for Danaher’s business and stock price to increase sustainably while they enable the discovery and manufacturing of key life-saving drugs.”
Danaher Corporation (NYSE:DHR) has a track record for successfully acquiring and integrating businesses (Beckman Coulter in 2011, Pall Corporation in 2015, and General Electric Life Sciences in 2020). The company recently acquired Cambridge-based biotech company Abcam, that makes proteins and reagents, for $5.7 billion in December 2023. The company’s Kaizen-based M&A philosophy has helped it acquire hundreds of businesses since 1984, some of which were troubled, and turn them into profitable entities. Danaher Corporation (NYSE:DHR) has grown its portfolio and global footprint across all its segments and has demonstrated strong capital allocation skills. In 2016, it spun off its industrial businesses into a separate industrial technology conglomerate Fortive in 2016. In 2019, it spun off its dental business into Envista in 2019. And in 2023, the group spun off its environmental services arm into a separate listed entity Veralto. These moves have created immense shareholder value and show how DHR’s continuous improvement-oriented approach throughout its operations has worked and will work for the years to come.
Why should growth investors who also want a bit of value buy DHR? Over the past 10 years, the company has grown its free cash flow at a compound annual growth rate of 5.8%. It converts over 100% of its profits into free cash flow and ended 2023 with an FCF of $5.78 billion (net income was $4.74 billion). It has a highly recurring revenue business model (over 50% of its revenue is recurring across all its segments), driven by consumables like filters and reagents. This also limits its downside risk to business cycles and translates into stable earnings. Moreover, new drug discovery spending and projects are expected to be a long-term catalyst for this company. One of its most opportunistic end-markets is bioprocessing i.e. its biotech segment, in the long term, as biotech spend picks up pace and recovers later in 2024. In Q1 2024, the company reported a 17% decline in core revenue in its biotech segment, led by weak demand from China. However, management remains optimistic and expects the new FDA wins for biologic and genomic medicines in 2023 to drive core revenue growth in its bioprocessing business to high-single digits, in the long term.
The company’s long-term business strategies, successful restructuring toward becoming a pure-play company with exposure to life sciences and diagnostics, and cash flow generation capabilities make DHR an attractive idea while it trades at 8.4 times its sales, close to its 5-year average of 6.7x. It isn’t a cheap stock though, trading at a forward PE of 35. However, most of the time you can’t buy quality companies at a discount. Hedge funds already piled into DHR, making it the 24th most popular stock among the 31 Most Popular Stocks Among Hedge Funds.
Danaher Corporation (NYSE:DHR) also ranks 4th on Dan Loeb’s top growth stocks list. To discover Dan Loeb’s top growth stock picks, check out our free report on of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb. While we acknowledge the potential of DHR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DHR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure. None. This article is originally published on Insider Monkey.