The Bill & Melinda Gates Foundation Trust’s Top Stock Picks for Q4

The Bill & Melinda Gates Foundation is the largest philanthropic organization in the world, founded by Bill Gates and Melinda Gates in 2000. Former bond-fund manager Michael Larson is in charge of managing the couple’s wealth and has been doing that since 1994, mainly through Cascade Investment, as well as overseeing the Bill & Melinda Gates Foundation Trust endowment. Although Cascade has not publicly revealed its performance, trustworthy sources suggest that Michael Larson has generated an annualized compound return of approximately 11% since 1995. A little more than a year ago, Bill Gates claimed: “Melinda and I are free to pursue our vision of a healthier and better-educated world because of what Michael has done”. Although the Bill & Melinda Gates Foundation Trust is a charitable organization, Insider Monkey follows its activity alongside an additional 737 investment firms, because of its sizable equity portfolio, which was valued at $17.24 billion on September 30, and its strong returns. With this in mind, the following article will lay out the top five stock picks of the Bill & Melinda Gates Foundation Trust at the end of the third quarter.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 48.7% gain) over the last 38 months (see the details here).

#5 Caterpillar Inc. (NYSE:CAT)

 – Shares Owned by the Bill & Melinda Gates Foundation Trust (as of September 30): 11.26 Million

 – Value of Holding (as of September 30): $736.01 Million

The Bill & Melinda Gates Foundation Trust’s position in Caterpillar Inc. (NYSE:CAT) was unchanged during the third quarter at 11.26 million shares, which accounted for 4.47% of its entire portfolio on September 30. The shares of the industrial giant are down by 23% for the year, but are currently trading at a cheap trailing price-to-earnings ratio of 14.59 (the ratio for the S&P 500 Index stands at 22.70). However, this valuation measure does not take into account the slowing demand for Caterpillar’s products as a result of the weakening global economy. More precisely, the slowing Chinese economy has put significant pressure on the company’s financial performance, but Caterpillar’s management anticipates that the Chinese market will rebound in the near future. Joel Greenblatt’s Gotham Asset Management upped its position in Caterpillar Inc. (NYSE:CAT) by 323,751 shares during the September quarter to 608,253 shares.

#4 Wal-Mart Stores Inc. (NYSE:WMT)

 – Shares Owned by the Bill & Melinda Gates Foundation Trust (as of September 30): 11.26 Million

 – Value of Holding (as of September 30): $736.01 Million

Wal-Mart Stores Inc. (NYSE:WMT) gained one spot in the list of Michal Larson’s top stock picks during the latest quarter even though the money manager did not undertake a rebalancing process with the position. The retail stores operator has seen its shares drop by 29% since the beginning of the year. Meanwhile, Wal-Mart has a trailing P/E ratio of 12.75, which is significantly below the average of the companies in the S&P 500. Earlier this week, the retail giant reported total revenue of $117.4 billion for the third quarter of fiscal year 2016, which was down by 1.3% year-over-year and slightly below analysts’ expectations of $117.86 billion. Its adjusted earnings per share decreased by 14% to $0.99, beating analysts’ estimates of $0.98. It is also worth pointing out that Wal-Mart’s U.S same-store sales rose for the fifth-straight quarter. Warren Buffett’s Berkshire Hathaway cut its stake in Wal-Mart Stores Inc. (NYSE:WMT) by 4.2 million shares during the September quarter, remaining with 56.19 million shares.