We recently published a list of Warren Buffett Disciple Guy Spier’s 10 High Conviction Stock Picks. In this article, we are going to take a look at where Moody’s Corporation (NYSE:MCO) stands against Guy Spier’s other high conviction stock picks.
Guy Spier’s Aquamarine Capital Management is a Zurich, Switzerland-based investment manager that employs the same long-term oriented, value investment approach as Warren Buffett, who Mr. Spier proudly considers himself a disciple of.
Spier earned a degree in philosophy, politics, and economics from Oxford University in 1988 and followed that up with an MBA from Harvard Business School. Foollowing that, he spent several years working as a researcher and investor on Wall Street, including stints at Braxton Associates and Buffett’s Berkshire Hathaway, the latter of which inspired him to launch his own value investing fund in 1997.
Spier is noteworthy in the investment world for his $650,100 lunch (alongside Mohnish Pabrai) with Warren Buffett in 2007, which was purchased through a charity auction. Spier took several important lessons from that meeting, including the necessity of saying no, and ultimately wrote a book about his takeaways from that lunch and his broader investment journey entitled ‘The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment’.
Mr. Spier makes all of his firm’s investment decisions himself and is an even more ardent value investor than Buffett, holding on to many of his positions for several years without touching them. In the second quarter the fund added two small new positions to its 13F portfolio while otherwise leaving the rest of it untouched. Its 13F portfolio held $263 million worth of assets on June 30, 74% of which were invested in finance stocks.
Aquamarine’s total return stands at 874% since inception through the end of 2023, or 9% annually, outperforming the S&P 500’s 717% returns during that period. Spier’s fund hasn’t been as successful in recent years however. It returned 18.7% last year, which underperformed the market, the sixth-straight year it’s failed to top the market. 2000, 2002, and 2006 were three of the fund’s strongest years, as it beat the market by more than 20%.
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). That’s why you should pay close attention to this important indicator.
A hand holding a rating chart, emphasizing the importance of credit ratings in the financial services sector.
Moody’s Corporation (NYSE:MCO)
Value of Aquamarine Capital Management’s 13F Position (6/30/2024): $11.4 million
Number of Hedge Fund Shareholders (3/31/2024): 61
As with many of his fund’s holdings, Guy Spier hasn’t touched a single share of his Moody’s Corporation (NYSE:MCO) position for years, dating all the way back to the middle of 2020. He added 2,000 MCO shares to his position during Q2 of that year, lifting his ownership to 27,000, where it’s remained ever since. Overall hedge fund ownership of the credit ratings agency also hit an all-time high during that quarter, and remains close to those levels as of Q1 2024.
There’s another Buffett connection with Moody’s Corporation (NYSE:MCO), as the company has been a longtime holding of the Oracle of Omaha’s as well. It’s no surprise why Buffett and other value investors like the company so much. Its ratings business has very little competition and is growing at an impressive pace, hitting $987 million in revenue in Q1, a 35% year-over-year jump. Moody’s also offers analytics-based risk assessment and management services to clients, a business which grew revenue by 8% in Q1, its 65th straight quarterly revenue increase.
L1 Capital International Fund took advantage of Moody’s Corporation (NYSE:MCO)’s soaring stock price to divest its position last year, but continued to monitor the stock for a possible re-entry point, as relayed in the fund’s Q3 2023 investor letter:
“Portfolio adjustments during the September 2023 quarter were modest, diversified, but meaningful. In total around 10% of the Fund was divested and reinvested into opportunities we consider provide a superior risk-adjusted base case return.
We continued to trim our investment in high-quality technology businesses such as Intuit, mentioned previously. These adjustments were purely for valuation considerations, rather than any business concerns and some of these companies remain significant portfolio holdings.
The Fund’s remaining investment in Moody’s Corporation (NYSE:MCO)’s was fully divested during the September quarter. Moody’s is the world’s leading credit rating, risk assessment and analytics business. The core credit ratings business is largely a duopoly with S&P Global, with modest competition from Fitch Ratings and regional competitors – a great example of our preferred ‘Noah’s Ark’ industry structure.
The share price of Moody’s has been volatile over recent times, often reacting too greatly to changes in short-term capital markets conditions. During the quarter we took advantage of positive market sentiment to divest our holding at a share price we considered to be above fair value. Moody’s is very well managed and ‘ticks all our boxes’ for one of the world’s highest-quality businesses. The company has moved from our Portfolio to our Bench of potential investments. Having a Bench of ‘ready to go’ investment opportunities is a core aspect of our investment process. We continue to analyse Moody’s as if we owned it and are excited by the pull-back in the share price from recent highs.”
Overall, MCO ranks 7th on our list of Guy Spier’s high conviction stock picks. While we acknowledge the potential of MCO, our conviction lies in the belief that 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 MCO 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 at Insider Monkey.
