Conviction. It's a concept that is rarely heard in investment
circles these days, but is still one of the key traits of top
investors. When they have conviction, they stick with an investment
idea for the long haul, undeterred by any near-term concerns that
may shake their faith. Indeed, many investors will book profits if
a stock has had a strong run. It's human nature -- for most of us.
Microsoft (Nasdaq: MSFT)
co-founder Bill Gates does the opposite. He continues to buy into
his favorite ideas even after they've been powering higher.
Case in point:
I told you about his interest in the company
three months ago
whenshares traded for about $26. His bullishness came at a time
when many analysts thought thatshares were fully-valued on the
basis of near-term operating metrics.
up about 42% to almost $34 since then, you'd think Gates might be
content to book hisprofit . But he's buying even more. In
fact he's made three huge purchases, boosting his holdings by
roughly 1.7 million shares to about 13.7 million. All told,
Gates' stake is worth about $468 million.
The perils of myopia
This remains as a great example of why you need to think
differently than Wall Street analysts. Let's take the analysis from
UBS as an example. Back in October, 2009, it rated shares as a
sell, predicting the stock would fall from $18 to $16. It noted
that shares looked expensive on a price-to-earnings (
) basis. While Gates was starting to build a position, looking at
where AutoNation will be in five years, UBS was only willing to
look ahead to 2010.
Throughout 2010, UBS' analysts steadily raised their price target
-- based on projected 2010 results -- yet always felt the stock was
too expensive. They recently boosted their price target to $27, a
price target based on expected 2011 results, and still think shares
areovervalued . We can guess how next year will play out...
Room to move higher?
Shares of AutoNation are steadily rising higher on the back of a
solid quarterly report that toppedprofit forecasts by nearly 30%.
The auto retailer has clear momentum, but it's hard to call the
stock a bargain at 17 times projected 2011 expected earning per
share (EPS ) of about $2. Then again, that's not why Bill Gates is
buying this stock.
Action to Take -->
Instead, Gates looks ahead to 2013 or 2014 when
could rise up to $3 as auto industry volume starts to rebound off
of the current low levels. That's why shares could eventually
approach $40. That's only about 18% upside from current levels, so
you couldn't blame us mere mortals for taking some profits on a
stock that has nearly doubled in the past year. But Bill Gates is
no mere mortal.
Gates sure has the magic touch. The top 15 holdings in the
foundation that he runs with his wife Melinda are all up during the
past six months. AutoNation,
Costco (Nasdaq: COST)
are all up more than 30% in that time frame. His investments in
McDonald's Corp. (
have barely budged, though. Perhaps his Midas Touch will work
similar magic on these names as well.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.