When looking for stocks to buy, it’s always smart to consider the top holdings or best ideas of successful investors.
The Harvard Management Company (HMC) has managed Harvard University’s endowment and related financial assets since 1974. HMC announced its fiscal 2019 performance Sept. 27. The $40.9 billion endowment gained 6.5% in the fiscal year ended June 30, down 350 basis points from 2018.
Although HMC is in the middle of an overhaul of its investment portfolio — N.P. Narvekar was hired in December 2016 to head up the university’s investment management team — it has made big strides in the last 33 months repositioning the endowment’s assets for long-term success.
Historically, HMC has generated an annualized total return of more than 11% since its founding 45 years ago, which is an excellent long-term track record. The fact is, every successful investor goes through a losing streak or a period of underperformance. Harvard is no different.
Once Narvekar completes his portfolio overhaul, investors can expect the endowment to be at the top of the performance charts once more. In the meantime, here are seven stocks to buy owned by Harvard Management Company.
Stocks to Buy: Alphabet (GOOGL, GOOG)
Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) is the largest of the 17 holdings reported by HMC at the end of June with 112,346 shares of the company’s Class A shares. The market value of those shares ($121.6 million) accounted for 30.0% of the $405.1 million in assets listed by HMC.
It’s important to remember that the $121 million investment is a small part of the endowment fund’s total portfolio. In 2018, for example, public equities accounted for 31% of the entire endowment. Yet, because HMC has invested most of those funds through outside investment managers, very few of its overall investments appear in SEC filings.
Nonetheless, the parent of Google is HMC’s largest holding in its 13-F. In May, I listed “7 Reasons to Buy Alphabet Stock Despite Its Earnings Miss.” Of those reasons, I would say that my three favorite reasons in no particular order would be healthy revenue growth, Google Cloud, and its massive free cash flow.
Despite generating 33% of the online global ad revenue, it is still growing them at more than 30% a quarter. It is this kind of healthy revenue growth that’s led to $27.4 billion in trailing 12-month free cash flow, allowing it to reinvest in growth businesses such as Google Cloud. When it comes to generating profits and cash flow, there aren’t many stocks better at it than Alphabet.
The maker of iPhones is HMC’s second-largest holding at 506,683 shares worth $100.3 million. Since HMC’s second-quarter filing at the end of June, Apple (NASDAQ:AAPL) stock has generated a 13.8% return for the endowment over the past three months. When its next 13-F comes out in November, its AAPL holdings ought to be closer to $114 million.
HMC first acquired 1.7 million shares of Apple stock in the first quarter of 2018. It has since scaled that back to less than a third of its original holdings. Apple stock has gained 33% in the 21 months between the end of 2017 and the end of September, an annualized return of almost 19%, not including dividends.
InvestorPlace contributor Wayne Duggan recently highlighted the fact that initial sales reports for Apple’s iPhone 11 has been very positive with pre-order activity in China, almost double what it was a year ago.
With more than 65 million iPhone users in China in need of an upgrade according to analysts, Apple skeptics might want to tone done their rhetoric a little. The demise of the iPhone’s been greatly exaggerated.
Booking Holdings (BKNG)
For HMC’s third-largest position, we go from two tech companies to a travel company that uses technology to bring travel providers together with consumers and businesses.
At a market cap of almost $84 billion, Booking Holdings (NASDAQ:BKNG), once known as Priceline because of its name-your-price feature for booking air travel, is now focusing more of its energy on the hotel and apartment rental business.
In February, Skift, an online magazine dedicated to the business of travel, detailed how Booking Holdings was in a dead heat with Airbnb in the world of alternative accommodations.
“Booking also revealed that it generated $2.8 billion in alternative accommodations revenue in 2018, accounting for 20 percent of the company’s overall revenue and that the business is ‘nicely profitable,’ stated Skift contributor Dennis Schaal. It’s one of the many reasons I recently named BKNG one of the seven stocks to buy benefiting from millennial money.
“Just because they [Millennials] want to travel, doesn’t mean they want to do it in the same manner as their parents,” I wrote Sept. 12. “Therefore, for travel companies to be successful, they’ve got to provide a combination of unique experiences, budget prices, and excellent customer service; three things that aren’t easy to deliver.”
As long as millennials continue to enjoy traveling, I’d expect HMC to continue to hang on to Booking Holdings.
Facebook (NASDAQ:FB) is HMC’s fourth-largest holding with 170,081 shares and a June 30 market value of $32.8 million.
Facebook CEO Mark Zuckerberg went to Harvard before dropping out in 2005 so that he could run his social media company on a full-time basis. Now he’s worth $69.0 billion or 50% more than Harvard’s entire endowment. How’s that for irony?
Recently, Zuckerberg addressed Facebook employees over concerns that 2020 presidential hopeful Elizabeth Warren would break up the company if elected. Zuckerberg is reported to have told employees that if Warren tries to break up the company, it would challenge the Senator’s plans in court — and win.
Warren didn’t back down, suggesting that companies like Facebook, which trample on people’s privacy rights, ought to be taken to task.
Earlier this year, I suggested that Facebook stock is great, but it’s a terrible company. I don’t think anything has changed to alter my opinion.
HMC clearly owns FB stock because of its position within the online advertising industry and the profits these ads generate and not because Harvard gave Zuckerberg an honorary degree in 2017.
Palo Alto Networks (PANW)
Of HMC’s eight stocks held, Palo Alto Networks (NYSE:PANW) is the fifth-largest holding with 54,006 shares and a June 30 market value of $11.0 million.
The California company specializes in cybersecurity products including firewall protection, endpoint protection, cloud security, and cybersecurity analytics. You would think in today’s world of computer security breaches, a company like Palo Alto would have a top-performing stock.
Unfortunately, that hasn’t been the case for PANW, which generated a total return of -9.5% over the past year, significantly worse than the total return (45.4%) of its application software peers. One reason for Palo Alto’s lack of performance could be the competitive threats from newer entrants in the cybersecurity marketplace.
“So I think the competition is Zscaler,” Palo Alto Chief Technology Officer Nir Zuk said in its Q4 2019 conference call. “However, I strongly believe that the right architecture and the right products at the end of the day win.”
The fact that HMC holds Palo Alto and not Zscaler suggests it believes PANW will be the ultimate winner.
iShares Core S&P 500 ETF (IVV)
Of HMC’s 17 holdings from its 13-F, nine are ETFs, with the iShares Core S&P 500 ETF (NYSEARCA:IVV) its largest holding with 72,147 shares and a June 30 market value of $21.3 million.
What’s interesting about HMC holding IVV is that it’s doing precisely what Warren Buffett suggests most individual investors ought to do: buy the stocks of America’s largest companies and never stop buying.
“The trick is not to pick the right company, the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently and to do it in a very, very low cost way,” Buffett stated in May 2017.
Well, IVV has a management expense ratio of just 0.04%. Even a big investment manager like HMC can’t do better than four basis points for 500 of America’s largest companies.
In fact, iShares uses IVV as one of seven ETFs to create a core portfolio of stocks and bonds for conservative, moderate, and aggressive investors. Under a really aggressive portfolio with 100% stocks and no bonds, IVV would account for 32% of the portfolio. If you can’t beat them, join them.
Vanguard FTSE Developed Markets ETF (VEA)
The Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) is an excellent complement to the IVV because it invests in a group of large-, mid-, and small-cap companies in developed countries such as Canada, while excluding the U.S.
It tracks the performance of the FTSE Developed All Cap ex US Index holding 3,959 stocks with 53% of the companies from Europe, another 37% from the Pacific region, and Canada and several other countries accounting for the rest.
The ETF’s top 10 holdings account for 10.5% of the fund’s $70.4 billion in total net assets. The median market cap of its 3,959 holdings is $27.5 billion, making VEA very much a large-cap ETF dressed up as an all-cap fund. HMC owns 329,167 shares of VEA, the second-largest holding of its nine ETFs, and has a market value of $13.7 million.
VEA and IVV have 3-year total returns of 6.3% and 13.4%, respectively, providing investors of all types with a good one-two punch.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.