Tom Yeung here with your Sunday Digest.
During the early 1990s real estate crisis, the Marriott Corp. hotel chain found itself in trouble. The company had overexpanded during the boom times of the 1980s, and the ensuing crash had left it with over a hundred unsellable hotels in an overbuilt market.
To save the firm, Chief Financial Officer Stephen Bollenbach created a breakup plan for the hotel chain. Under the agreement, Marriott would keep its lucrative management business (the “good” Marriott), while spinning off its less profitable assets and debts (the “bad” Marriott) into a new entity known as Host Marriott.
Most investors opted to hold onto the “good” Marriott. After all, why buy a toxic waste dump when a profitable, debt-free alternative exists?
But billionaire investors often think differently. As Joel Greenblatt of the $6 billion Gotham Asset Management hedge fund wrote about Marriott’s breakup in his 1997 book, You Can Be a Stock Market Genius…
Obviously, I was excited about… the toxic waste. “Who the hell is gonna want to own this thing?” was the way my thinking went. No institution, no individual, nobody and their mother would possibly hold onto the newly created Host Marriott after the spinoff took place. The selling pressure would be tremendous. I’d be the only one around scooping up the bargain-priced stock.
The result was nothing short of incredible. Over the next three years, the “bad” Marriott would divest its airport and toll-road concessions, add 55 hotels to its portfolio, and complete the sale/leaseback of all Courtyard and Residence Inn hotels. By 1999, it became the largest U.S. hotel-based real estate investment trust (REIT).
These improvements also translated into share-price gains. Within five months of the spinoff, the “bad” Marriott’s stock more than tripled, and shares would rise another 80% by the end of the decade.
This is a pattern we see repeatedly. Well-informed hedge fund managers often make decisions that seem counterintuitive… and then make out like bandits after their reasoning is known.
Now, these decisions are available for you to see.
On Tuesday, September 24 at 8 p.m. Eastern time, InvestorPlace Macro Investing Specialist Eric Fry and a special guest of his are going to reveal a unique way you could quickly grow your money while also being safe from any devastating losses moving forward. (You can reserve your spot for that event now by going here.)
They have done extensive back-testing on the holdings of more than two dozen billionaires – like Warren Buffett, Bill Gates, and Ray Dalio – and have found ways to even improve on this billionaire’s club of investors.
In the meantime, I’ve been given special permission to share three of these stocks that billionaires are buying now with you today.
A Series of Tubes
In 2006, then-Alaska U.S. Sen. Ted Stevens famously described the internet as “a series of tubes.” Many commentators ridiculed him at the time for the simplistic description, but experts have since noted that there are some truths to the comparison.
The internet, indeed, is an interconnected web of billions of computers and other electronic devices. Each device is assigned an IP address, a string of data that looks like “2001:0:130F:0:0:9C0:876A:130B,”and directing the flow of information between these devices is the job of firms like VeriSign Inc. (VRSN).
Verisign is a registry service company that manages the world’s Doman Name System (DNS). It’s the massive address books that link readable website names (i.e., facebook.com or investorplace.com) to the correct IP addresses that run them. If the internet were a series of tubes, VeriSign would be the company responsible for turning the valves to make sure data is routed to the right place.
The Northern Virginia-based firm is a particularly important player because holds exclusive registry service rights for two of the world’s most popular top-level domains: .com and .net. Any entity that wants a .com or .net domain must buy it through VeriSign, which charges a $9.59 annual fee for the service. And any internet user who types in any website address ending in these domains will be routed to one of VeriSign’s global constellations of servers to reach these sites.
The company traces its monopolistic position to Internet Corporation for Assigned Names and Numbers (ICANN), the global nonprofit organization responsible for maintaining the internet’s secure and stable operation. DNS contracts with ICANN are renewed every six years, and incumbent players are given presumptive right of renewal if they meet contractual obligations.
VeriSign has done an outstanding job at maintaining its position. The company has now provided almost three decades of uninterrupted DNS services since taking on the business, and it has funneled its large stream of profits into further improvements of its infrastructure and cybersecurity. Even if VeriSign’s contract goes up for auction, registry providers like Identity Digital and Radix are unlikely to match its capabilities.
Industry profits are also both high and stable. ICANN typically allows registry service companies to raise prices 7% per year – well above rates of inflation – and fees tend to be stable through the lifetime of each contract. VeriSign will almost certainly earn return on assets in excess of 40% for the next decade. In addition, the company is on track for automatic renewal of its .com contract in November 2024, and its current .net contract runs through 2029.
That’s why recent billionaire purchases now suggest that a 20% stock selloff is massively overdone. Since the end of 2023, shares have sold off on weakening Chinese demand and the rising popularity of country-specific domains like “.cn” and “.in.” Eric’s special guest’s system suggests this fear has now gone too far, and it’s time to buy back into this lucrative firm.
The Takeover Candidate
Shares of eyecare firm Bausch + Lomb Corp. (BLCO) have surged 30% over the past several weeks on growing interest by private equity companies. At least a half-dozen firms are lining up to make an offer, and analysts at the Financial Times believe the firm could be sold for $11.5 billion including debt.
The final figure could be closer to $12 billion to $14 billion, given the intense competition between private equity bidders. One of Bausch + Lomb’s suitors, TPG, has particularly large incentives to complete a deal because it could combine BLCO with BVI Medical, an ophthalmology firm it already owns.
Billionaires, however, have their eyes on a different firm: Bausch Health Cos. Inc. (BHC).
The healthcare conglomerate formerly known as Valent Pharmaceuticals is the majority owner of BLCO stock, holding 88% of all outstanding shares. (BHC also holds stakes in Salix, Solta Medica, and several other medical firms.) The recent spike in BLCO shares have come with zero reaction by BHC stock.
That will likely change over the coming months as a deal gets finalized. Parent company BHC is highly indebted, with a $2.9 billion equity stub sitting on top of $21.2 billion in debt. So, every 1% increase in enterprise value theoretically increases its equity by 8.6%.
That means a higher-than-expected sale value of its BLCO subsidiary could have an enormous impact on BHC’s share prices. Eric’s guest’s system is already detecting large cluster buying by some of the top billionaires, and we expect this company to become a classic “sum of the parts” play as BLCO gets sold off.
The New AI Kid on the Block
Rubrik Inc. (RBRK) is a cybersecurity company that went public in April. The firm combines threat prevention with cyber recovery to help firms recover when breaches inevitably happen.
The Silicon Valley-based firm has been growing fast. Annual recurring revenue rose 40% to $919 million last quarter, and net retention rates remain above 120% thanks to upselling and low customer churn. Analysts expect sales to rise in the upper 20% range through 2027, and for profits to flip positive sometime in 2028.
A recent selloff now has billionaire investors sensing an opportunity. Over the past several months, notable fund managers have poured millions of dollars into this promising bet on cybersecurity growth. Institutional ownership has also been on the rise – a positive sign of gains to come. Data analytics firm Fintel notes that shares owned by institutional investors have risen from just 5 million to over 40 million in less than three months.
The company’s September 9 earnings report gives additional reason for cheer. Rubrik beat sales and earnings-per-share estimates by 4% and 18%, respectively, and analysts have raised their current-year earnings estimates by 8% and next-year estimates by 6%.
Perhaps most importantly, Rubrik appears to be on the right side of history. Analysts at Gartner believe global spending on security and risk management will rise 15.1% next year, and that the rise of generative AI will make large-scale social engineering attacks far more common.
By 2027, almost a fifth of all cyberattacks are forecasted to involve generative AI. That will make risk mitigation and data recovery a far more crucial aspect of cybersecurity, which is precisely the business Rubrik is in.
The Next Marriott
This is only a short sample of the dozens of stocks that billionaires are buying right now. So, we’d like to offer you a free report that outlines seven of these companies that the world’s smartest and wealthiest billionaires are buying in bulk today.
I’m particularly excited for one of these companies for its similarities to the Marriott spinoff.
Earlier this year, one of the companies in the Dow Jones Industrial Average decided to split their slowest-growing department into an independent firm. They would also “gift” $8.3 billion of their debts to this new entity, creating a “toxic waste dump” with negative tangible equity and relatively low prospects for growth.
The effects were what you might expect. Shares of this new entity fell 40% in initial trading as index funds liquidated their stakes. The spinoff was not part of the Dow Jones index, and so tracking funds were forced to liquidate their shares.
But since then, the stock has rebounded. In August, management flipped its 2024 guidance from a revenue decline to a slight revenue increase. And billionaires are now buying shares in enormous quantities. If history is any guide, this firm looks set to do keep rising over the next several years.
To get the name of this company and six others, in our 7 Stocks Billionaires Are Buying with Both Hands free report, first reserve your spot for Eric and his guest’s event on Tuesday at 8 p.m.
During that event, they’ll reveal a powerful system that can keep you confidently in the markets squeezing out as much profit as possible… while also alerting you before the next big selloff occurs. Sign up now.
And I’ll see you back here next Sunday.
Regards,
Thomas Yeung
Markets Analyst, InvestorPlace