Bill Gates Foundation Trust Beats the Market with 3 Smart Stock Picks: Microsoft, Berkshire Hathaway, and Waste Management

With a return of 47% over the past three years compared to the S&P 500’s 32%, the Bill and Melinda Gates Foundation Trust has certainly outshined the broader market. A striking aspect of this stellar performance is that 66% of the trust’s assets are concentrated in just three companies. Let’s delve into the stocks that have caught the eye of billionaire Bill Gates and understand their appeal.

Microsoft (NASDAQ:MSFT) - 34% of the Portfolio

Accounting for over a third of the portfolio, Microsoft delivered impressive financial results in Q3 of fiscal 2024, ending March 31. The tech giant saw a revenue increase of 17% to $61.9 billion, with GAAP net income climbing 20% to $2.94 per diluted share. The company’s momentum in enterprise software and cloud computing, driven by the demand for AI services, has been a significant growth driver.

The bull case for Microsoft is simple: it's the world’s largest enterprise software company and the second-largest provider of cloud services. With both markets projected to grow at 14% and 21% annually through 2030, respectively, Microsoft is a formidable player. Additionally, new revenue streams from AI products like Microsoft 365 Copilot and Azure OpenAI Service are just beginning to make their mark.

Wall Street forecasts earnings per share to grow at 13.7% annually over the next three to five years. Given that Microsoft has not fully monetized its AI offerings yet, there could be more upside. However, with a current price-to-earnings (P/E) ratio of 36, the stock seems fairly to slightly overvalued. The PEG ratio of 2.6, higher than its three-year average of 2.4, suggests it might be wise to wait for a dip before buying in significant volumes. But for those patient investors, initiating a small position now could still be a sound strategy.

Berkshire Hathaway (NYSE:BRK.A / BRK.B) - 16% of the Portfolio

Holding 16% of the trust’s assets, Berkshire Hathaway posted solid Q1 results. Revenue climbed 5.2% to $90 billion, driven by robust performance from its insurance subsidiaries, while operating earnings surged 39% to $11.2 billion.

The strength of Berkshire lies in its leading position in property and casualty insurance, generating consistent cash flow through premiums—capital that CEO Warren Buffett has masterfully invested. Over the past decade, Berkshire’s book value per share has grown at an annual rate of 11%. Beyond insurance, Berkshire’s portfolio of diverse subsidiaries—which span transportation, energy, manufacturing, and retail—provide essential services, contributing to its resilience through market downturns.

Historically, Berkshire has outperformed the S&P 500 during bear markets, and Buffett believes it can continue to outperform average U.S. businesses with less risk of capital loss. His confidence, coupled with the company's diversified robust nature, makes Berkshire a compelling investment.

Waste Management (NYSE:WM) - 16% of the Portfolio

Also occupying 16% of the BMG Foundation Trust, Waste Management reported mixed Q1 results. While revenue grew 5.5% to $5.2 billion—falling short of Wall Street’s 6.7% expectation—GAAP net income rose 35% to $1.75 per diluted share, exceeding the anticipated 15% growth.

The company’s strong suit lies in its status as the largest waste collection and disposal services provider in North America, controlling 28% of the U.S. landfill volume. This advantage is tough to replicate due to significant regulatory barriers. Waste Management’s essential services ensure stable demand across economic cycles, and its extensive network of transfer stations and landfills create a moat that supports pricing power.

In bear markets, Waste Management has consistently outperformed the S&P 500. The waste management market is expected to grow at an annualized rate of 5.4% through 2030, and Wall Street predicts Waste Management’s earnings per share will grow by 11.1% annually over the next three to five years. With a current P/E ratio of 33, the stock seems slightly expensive; a PEG ratio near 3 suggests a more favorable entry point might be around the corner.

In sum, while these stocks dominate Gates’ portfolio and offer strong upside potential due to their resilient and diverse natures, cautious investors might wait for more attractive valuations to maximize returns. However, a small position in these blue-chip stocks now could still be rewarding.