Between earnings season, weekly economic data releases, Federal Reserve commentary, and most recently the drama surrounding bank stocks, it can be difficult to keep up with important news. That’s why quarterly Form 13F filings with the Securities and Exchange Commission (SEC) can be so valuable.

A 13F is essentially a snapshot of what the most successful investors on Wall Street were holding in their funds or portfolios as of the end of the most recent quarter. It’s a required filing for institutional money managers with at least $100 million in assets under management, and it provides investors a very clear look at what these top-notch investors have been buying and selling.

Although 2022 was a difficult year for many investors, 13Fs show that billionaire money managers found solace in a trend that also intrigued everyday investors: stock-split stocks.

A stock split is an event that allows a publicly traded company to alter its share price and outstanding share count without impacting its market value or operations. Forward stock splits, which reduce the share price of a high-flying stock, are of the utmost interest.

Based on 13Fs from the fourth quarter, billionaires simply couldn’t stop buying three supercharged stock-split stocks.

Tesla
The first stock-split stock that was an extremely popular buy among billionaire money managers during the fourth quarter is electric-vehicle (EV) manufacturer Tesla (TSLA). Tesla conducted a 3-for-1 split this past August.

All told, seven billionaires made sizable purchases. This includes Jeff Yass of Susquehanna International (11.48 million shares), Ken Griffin of Citadel Advisors (4.82 million shares), Jim Simons of Renaissance Technologies (3.4 million shares), John Overdeck and David Siegel of Two Sigma Investments (1.18 million shares), Steven Cohen of Point72 Asset Management (878,000 shares), and Israel Englander of Millennium Management (796,000 shares).

Their collective fascination with Tesla probably had to do with North America’s leading EV producer shedding more than half of its value in a three-month stretch. Unlike new and legacy automakers, whose EV divisions are almost universally losing money, Tesla has produced three consecutive years of generally accepted accounting principles (GAAP) profits. To these billionaires, a greater than 50% haircut in share price may be viewed as a value.

Additionally, Tesla is expected to launch its much-anticipated Cybertruck later this year. Although reservations are just $100 and fully refundable, the company reached 1.5 million preorders, as of November 2022. It’s not uncommon for investors to pile into Tesla stock prior to the launch of a new EV model.

But even billionaire investors can be wrong — as I believe they are with Tesla.

One reason to be concerned is Tesla’s rash of price cuts in the U.S. and China of up to 20%. Though optimists might tout these price cuts as nothing more than Tesla becoming more efficient with its production, rising inventory levels and increased competition would beg to differ.

The company isn’t getting any help from its ancillary operations, either. Solar installation has been losing money since its inception, and its energy and services segments aren’t generating below-the-line profits. Tesla is, ultimately, entirely reliant on selling and leasing EVs, which is a problem, since most auto stocks trade at price-to-earnings multiples of 6 to 8, not close to 50 like Tesla.

Palo Alto Networks
A second surefire stock-split stock that billionaire investors can’t stop buying is cybersecurity company Palo Alto Networks (PANW). Palo Alto completed a 3-for-1 split in September.

A half-dozen billionaire fund managers were busy mashing the buy button during the fourth quarter. Jim Simons at Renaissance was the big buyer (1.06 million shares), along with Ken Griffin at Citadel (838,840 shares), Jeff Yass at Susquehanna (596,380 shares), John Overdeck and David Siegel at Two Sigma (421,813 shares), and Israel Englander at Millennium Management (331,665 shares).

Amid plenty of volatility and uncertainty on Wall Street, the beauty of cybersecurity stocks like Palo Alto is that they provide a near-necessity service. Hackers don’t take time off from trying to steal sensitive data just because Wall Street hits a rough patch. Businesses with an online and/or cloud presence require protection in any economic environment.

Palo Alto Networks is more than four years into an ongoing transformation that’s seen the company focus on cloud-based software-as-a-service (SaaS) solutions and de-emphasize physical firewall products. Through the first six months of fiscal 2023, almost 79% of its sales have come from SaaS cybersecurity solutions, which is up 18 percentage points in less than five years.

There are a couple of reasons Palo Alto made this switch. For one, cloud-based SaaS software is typically nimbler and more effective at recognizing and responding to potential threats than physical products and on-premises solutions. Also, SaaS solutions offer higher long-term margins than physical firewall products, and a subscription-dependent operating model should lead to less revenue lumpiness during product replacement cycles.

Based on Palo Alto’s operating results, its transformation is knocking it out of the park. Next-generation security annual recurring revenue of $2.33 billion for the January-ended quarter surged 63% from the prior-year period. Meanwhile, Prisma Cloud users are increasingly adding on to their initial purchase.

Between steady organic growth opportunities and the company’s penchant for making bolt-on acquisitions, Palo Alto Networks is well positioned to sustain its double-digit growth rate.

Amazon
The third stock-split stock billionaires can’t stop buying is e-commerce company Amazon (AMZN). The online giant enacted a 20-for-1 forward split in June 2022.

Altogether, eight billionaire investors piled into this popular FAANG stock. This includes Jim Simons of Renaissance (8.2 million shares), Chase Coleman of Tiger Global (5.91 million shares), Steven Cohen of Point72 (3.21 million shares), Ole Andreas Halvorsen of Viking Global (3.2 million shares), Stephen Mandel of Lone Pine Capital (2.96 million shares), John Overdeck and David Siegel of Two Sigma (2.76 million shares), and Israel Englander of Millennium (2.7 million shares).

Most people are familiar with Amazon because of its dominant online marketplace. eMarketer estimated that Amazon would account for just shy of 40% of U.S. online retail sales last year, which is over 8 percentage points more than its 14 closest competitors on a combined basis. But what investors might be surprised to learn — and what’s almost certainly intriguing these eight billionaires — is that the vast majority of Amazon’s operating cash flow derives from its ancillary segments.

Amazon’s most important operating segment is Amazon Web Services (AWS). Enterprise cloud infrastructure spending is still in its early stages of growth, and AWS accounts for nearly a third of global cloud infrastructure service market share, according to research firm Canalys. Despite bringing in just one-sixth of Amazon’s net sales, AWS is regularly responsible for 50% to 100% of the company’s operating income.

Subscription services are another key segment for cash-flow generation. Amazon surpassed 200 million global Prime members in April 2021 and has assuredly added to this figure since gaining the exclusive rights to Thursday Night Football. Subscriptions provide high-margin, recurring revenue for the company.

Although it’s quite possible a U.S. or global recession would send revenue at Amazon’s largest operating segment (its online marketplace) into reverse, sustained double-digit growth at its ancillary operations can lead to a steady uptick in cash flow. Since Amazon tends to aggressively reinvest in its logistics network and high-growth initiatives, cash flow is what matters most.

After spending the 2010s at a median price-to-cash-flow of 30, Amazon shares can currently be purchased for less than 10 times Wall Street’s forecast cash flow for 2024.

— Sean Williams

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Source: The Motley Fool