Two industry-leading tech companies — which aren’t exactly value stocks — have been top buys for Fundsmith’s traditionally value-focused billionaire chief, Terry Smith.
In case you missed it, one of the most important data releases of the fourth quarter occurred less than three weeks ago — and no, it has nothing to do with the October inflation report or Nvidia‘s earnings release.
Nov. 14 marked the deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with the Securities and Exchange Commission (SEC). A 13F is a filing that allows investors to see which stocks Wall Street’s leading money managers purchased and sold in the most recent quarter.
Admittedly, 13Fs have their flaws. They can be filed up to 45 days following the end to a quarter, which means the portfolio snapshot they provide might be stale for active hedge funds. Nevertheless, 13Fs help alert investors to the stocks and trends that are piquing the interest of these top-tier asset managers, which is where the value of these filings lies.
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There isn’t a 13F filing that garners more attention on Wall Street than that of Warren Buffett’s Berkshire Hathaway. Professional and everyday investors wait on pins and needles to discover which stocks the “Oracle of Omaha” has been buying and selling.
But 13F filing season is about far more than just Warren Buffett. One of the most-followed of all billionaire investors happens to be Terry Smith of Fundsmith, who’s commonly referred to as “Britain’s Warren Buffett.” This is because Smith’s investment style focuses on locating amazing deals hiding in plain sight, just like the Oracle of Omaha.
Fundsmith’s chief closed out the September quarter overseeing more than $25 billion in AUM, which was spread across 40 stocks. However, there are two stocks among these 40 that Britain’s Warren Buffett has been gobbling up shares of and clearly wants to own as we head into the new year.
Apple
Although Terry Smith has actually pared down a majority of his fund’s holdings this year, one unstoppable stock that he’s continued to add to is tech colossus Apple (AAPL 0.95%). Since the year began, Smith has overseen the purchase of 224,004 shares, which equates to a 17% increase in nine months.
One of the top reasons to like Apple is its exceptionally loyal customer base. The company’s valuable brand name and innovative products have a knack for luring in consumers and keeping them loyal to its ecosystem.
More importantly, Apple has shifted its focus under CEO Tim Cook’s leadership to subscription services. While the company isn’t abandoning the physical devices, such as iPhone, that brought it fame and earned it a large following, it’s evolving as a platform’s-driven business. Promoting subscription services should smooth out the revenue fluctuations that often accompany major iPhone upgrade cycles, as well as lift Apple’s operating margin over time.
Another reason asset managers like billionaire Terry Smith buy Apple stock is because of its unparalleled share repurchase program. Since initiating a buyback program in 2013, Apple has bought back $700.6 billion worth of its common shares and reduced its outstanding share count by more than 42%. For companies with steady or growing net income, buybacks can play a key role in boosting earnings per share (EPS), which can make a company’s stock look more fundamentally attractive.
However, Apple is somewhat of an interesting selection for Terry Smith given his focus on value. Apple stock is trading at 39 times its trailing-12-month EPS, and a lofty multiple of 32 times forecast EPS for fiscal 2025, which will end on Sept. 30. It’s one of the priciest valuations for Apple stock in quite some time, especially when investors consider that Apple’s physical product growth engine has stalled.
The other potential issue for Apple is the prospect of tariffs being instituted by President-Elect Donald Trump. Apple imports quite a bit from China, and the incoming president has threatened to place a 35% tariff on all Chinese imports on Day One in the Oval Office, which may adversely impact Apple’s bottom line.
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Texas Instruments
The other sensational stock Britain’s Warren Buffett very clearly wants to own as we ready to turn the page on 2025 is analog chipmaker and embedded processor company Texas Instruments (TXN 0.37%).
Entering 2024, Fundsmith didn’t hold a single share of Texas Instruments. But as of Sept. 30, Smith’s fund has gobbled up 1,700,630 shares, which makes it the 20th-largest position, based on market value.
Arguably the top reason to be bullish on Texas Instruments’ stock right now is the health of the U.S. economy. Despite a couple of predictive metrics and forecasting tools cautioning of a recession, the U.S. economy has avoided a hard landing. Semiconductor stocks are highly cyclical and tend to ebb-and-flow with the health of the U.S. and global economy. Since periods of growth, historically, last substantially longer than recessions, Texas Instruments is the type of business that favors patient investors, like Terry Smith.
Similar to Apple, Texas Instruments has an enviable capital-return program. The company’s board authorized a $15 billion share repurchase program in 2022, and has approved an increase in the company’s base annual payout for 21 consecutive years. Texas Instruments’ 2.7% yield is double that of the benchmark S&P 500, while the company’s outstanding share count has been reduced by more than 47% since the mid-2000s. As noted, a declining share count can lift EPS and make a company’s stock more attractive to value investors.
But there are also a few reasons why Terry Smith’s Texas Instruments addition is a bit of a head-scratcher. To start with, the company has been aggressively increasing its capital expenditures (capex) in an effort to boost its chip fabrication output. While this looked like a no-brainer move earlier in the decade, a chip-supply glut in the wake of the 2022 bear market has led to stagnant sales and exposed the company’s higher expenses and notably reduced free cash flow (FCF).
The other issue for Texas Instruments is that it’s not exactly a value stock. Despite Smith being an ardent value investor like Warren Buffett, he’s been piling in with Texas Instruments valued at close to 35 times forward-year earnings. If the company were to pare back its capex and refocus on FCF growth, this aggressive valuation, when coupled with high-single-digit/low-double-digit sales growth, might make sense. But as things stand now, Texas Instruments’ valuation appears frothy.