Is Alphabet the ultimate Guru Gem?
Our journey continues: from Montreal to Mountain View
Welcome to the second edition of the Guru Gems Newsletter! A newsletter focused on unearthing investment wisdom from the world’s long-term investing masters. In case you missed our first edition, see here.
With Guru Gems, I am documenting my journey as I research investing masters who have a long-term view. Then I look for the high quality companies in their portfolio. The goal is to create a portfolio of 8-12 stocks that will hopefully beat the index in the long run.
A word on the current state of the markets
The markets have been going a bit crazy lately, driven by a trade war and economic uncertainty. Investors are fearful, reflected by the Fear & Greed Index alternating between ‘Fear’ and ‘Extreme Fear’ for a few weeks now. But for long-term investors, this is all noise. And in fact, times like these may be a perfect opportunity to pick up some wonderful gems at discounted prices.
“Volatility is our friend, always. The price we pay will determine the rate of return”
Christopher Begg on the Richer Wiser Happier podcast (episode 056)
We will not dwell too much on the state of the markets in this newsletter and instead stay focused on our goal.
“Some people really do not have the temperament, or emotional stability, or whatever it may be, to invest in securities.
In the end, what counts is buying a good business at a decent price, and then forgetting about it for a long, long, long time. And some people can do it and some people can’t.”
Warren Buffett during the 2010 Berkshire Annual Meeting
ABC easy as 123
An obvious question to start with when putting together a portfolio of gems owned by investing masters, could be: “What is the most common owned stock across all Gurus?”
For this we can use Dataroma, which tracks the portfolios of nearly 80 Superinvestors:
Alphabet appears twice: GOOGL class A shares with voting rights, and GOOG class C shares without voting rights. Together, they make Alphabet the most owned stock.
Not all investors tracked by Dataroma would qualify as long-term investors for us, but from a quick research amongst the ones that do qualify, Alphabet is certainly still a top owned stock.
In fact, 4 out of 4 Gurus mentioned in our first 2 newsletters, have Alphabet in their portfolio:
*Actual % lower due to non-US holdings not reflected on Dataroma
The last guru on the above table is François Rochon, president of Giverny Capital. He is an investing master who has significantly outperformed the index since inception of his Rochon Global portfolio.
Like us here at Guru Gems, François learned from the masters that came before him. Here is the opening sentence of his latest annual letter:
It has been more than 30 years since I discovered the writings of Warren Buffett, Benjamin Graham, John Templeton, Philip Fisher and Peter Lynch. I then decided to begin managing a family portfolio based on an investment approach synthesized from these great money managers.
François Rochon has a real focus on the long term, which makes him a great candidate to include in our pool of Gurus to study. His annual letters contain several pearls of wisdom and I would highly recommend reading them.
The ‘Five-year Post-mortem’ section in the annual letter is a perfect illustration of his long-term thinking where he analyzes purchases made 5 years ago and where they currently stand.
‘The Podium of Errors’ section is another fantastic look inside the mind of this Superinvestor:
It is with a constructive attitude, in order to always improve as investors, that we provide this detailed analysis. As is often the case with stocks, errors from omission (non-purchases) are often more costly than errors from commission (purchases)… even if we don’t see those on our statements.
Fun fact: the Gold Medal on ‘The Podium of Errors’ in the 2022 annual letter was awarded to LVMH, a gem we discussed in our first newsletter. Here is what François Rochon wrote:
LVMH is a French company that I have followed for a long time. […] I have always admired the many competitive advantages of the company and the management of its president Bernard Arnault.
During the euro crisis in the summer of 2011, LVHM stock fell to less than €100 and was trading at around 16 times earnings. To be able to acquire one of the best companies in the world at an attractive valuation is an opportunity that I should have known to seize. I seriously considered it but preferred to wait for an even more attractive evaluation. […]
[…] The stock reached €800 at the start of 2023 for an annual return of more than 20% over these eleven years (and that’s not counting dividends). I am still looking for an excuse to explain this indecision.
I wonder if, at the current valuation, he is considering to finally include this gem in his portfolio…
To buy or not to buy
This is the part where we decide whether to add Alphabet to our Guru Gems portfolio or not. Let’s apply Terry Smith’s three-step investment strategy that we learned in the first edition of this newsletter:
1/ Buy Good Companies
Alphabet needs no introduction. We all use their services. Its main sources of revenue come from Google Search, YouTube Ads, Google Network, Google Subscriptions and Google Cloud (‘Other Bets’ like Waymo is still very small).
Here are just a few metrics that show why this is such a wonderful company:
20-yr revenue CAGR* of 26%
Google Cloud $10B in ARR* to $48B in 5 years (now roughly 12% of total revenues)
Waymo weekly rides 250k in April (up from 50k in Jul 2024)
*CAGR = Compound Annual Growth Rate
*ARR = Annual Recurring Revenue
Q1 earnings were also released just this week and they showed very strong results. Here is a link with some cool visuals on the Q1 earnings numbers.
2/ Don’t Overpay
I started writing the first draft of this newsletter in the beginning of the week when Alphabet’s share price was around $147. It closed the week at just below $162 which is a 10%(!) increase over the week.
Alphabet’s EV/EBIT* is at 16 which it is still 27% below its 6yr average as shown on the chart below.
*EV/EBIT is a ratio to assess the value of a company relative to its earnings; EV = Enterprise Value which is essentially a measure of a company’s total value (Market cap + Debt - Cash); EBIT is Earnings Before Interest and Taxes. A lower EV/EBIT ratio generally suggests a stock may be undervalued.
At this valuation it is by far the cheapest of the Magnificent 7, probably reflecting some of the legal headaches Alphabet is still facing with antitrust cases (more on that also in the link shared on the Q1 earnings).
Finally, it is also worth noting that Alphabet announced a stock repurchase up to an additional $70B which could be an indication that Alphabet board deems the stock to be undervalued as well.
3/ Do Nothing
So, with 4 Gurus (and many more) owning the stock, and a valuation well below its historical average, we will add Alphabet to our portfolio and allocate 4-5% to this position. Had the stock price from earlier this week stayed the same, I would have maybe made it a bigger position. I will buy more if the price drops back to these previous levels, similar to what I did with LVMH.
And once purchased, we do nothing, and forget about it for a long, long, long time…
Learn more about the Gurus
I hope you enjoyed this second newsletter. If you are new to investing or curious to learn more about investing Gurus, I would highly recommend William Green's book Richer, Wiser, Happier. It's a fantastic book about how the world's greatest investors win in markets and life. There is also a podcast under the same name (the episodes are featured on The Investor’s Podcast Network). Here are the episodes with François Rochon and Christopher Begg: