Bill Gates' Trust Loads Up on 2 Defensive Stocks

Bill Gates says there is 'gold in garbage'

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Nov 25, 2022
Summary
  • The Bill Gates Foundation has invested into two defensive stocks as per its most recent 13F report, Waste Connections and Kraft Heinz. 
  • Waste Connections is in the garbage disposal business, an industry that tends to attract less competition and thus is a contrarian investment. 
  • Kraft Heinz is a blue chip food processor which is also owned by Warren Buffett. 
  • Both food and waste disposal are defensive industries as people will always need these services no matter what the macroeconomic environment. 
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Bill Gates (Trades, Portfolio) is one of the richest men in the world and one of the greatest entrepreneurs of our time, as the founder of Microsoft (MSFT, Financial). Gates stepped down as CEO of Microsoft in the year 2000 and then finally left his board seat in 2020 to focus on his foundation. The Bill and Melinda Gates Foundation Trust has $33.99 billion in assets and invests in many companies which are doing good for the world, but also can offer great investing returns. It should be noted that Gates himself doesn't choose the majority of the stocks held in the foundation - he leaves that to his portfolio managers, though he does set the overall "philosophy" of the operation.

Since the foundation trust recently disclosed its 13F report for the third quarter of 2022, let's go over two defensive stocks that it loaded up on in the third quarter.

Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.

1. Waste Connections

Waste Connections (WCN, Financial) is the third largest waste management company in North America and has a vast network of operations across 41 U.S. states and six Canadian provinces.

Waste disposal may not seem very exciting, but this is exactly why companies in this industry can be great investments. Legendary investor Peter Lynch, in his famous book “One Up on Wall Street,” wrote about the benefits of investing in “unpopular industries” such as funeral homes and waste disposal. These are unloved industries that often get less attention from retail investors and analysts who are chasing the latest exciting tech stock. For these reasons, stocks in this industry are often undervalued. In addition, very little venture capital money or budding entrepreneurs wake up and say they want to disrupt the garbage industry, as it just does not seem very exciting. But this lack of new entrants generally means a lack of competition and higher returns on capital.

Waste management is part of a defensive industry, as people will always produce trash in good times and bad times.

Waste Connections offers garbage pickup and dumpster rentals. The Industry of waste disposal has begun to rebrand itself in recent years to focus on recycling and climate change. For example, “Mount Trashmore” in Florida was renamed the "Monarch Hill Renewable Energy Park." A simple rebranding may not seem like a big deal, but in the world of investing and human psychology, it is. The majority of people want to help stop climate change and many “green energy” stocks trade at a premium for this reason.

Therefore, if more companies in the waste disposal industry can change their branding and focus on helping the planet, this should help to add a premium to their stock prices.

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Solid financials

Waste Connections has generated solid financial results for the third quarter of 2022. Revenue was $1.88 billion, which increased by 12.5% year over year and beat analyst expectations by $4.5 million.

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The company also reported solid profits, with earnings per share of $0.92, which beat analyst expectations by $0.01. Its free cash flow has also jumped by a rapid 44% year over year to $245 million in the quarter.

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Waste Connections has a solid balance sheet with $214 million in cash and short term investments versus $6.2 billion in long term debt, of which just $6.7 million in current debt, due within the next two years.

The Gates foundation's investment

The Gates foundation purchased over 2 million shares of this stock during the quarter, during which shares traded at an average price of $136, which is close to where the stock trades at the time of writing.

The foundation also added to its position in Waste Management (WM, Financial), the largest waste management company in the U.S., marking a notable industry bet rather than a specific company bet.

Valuation

Waste Connections trades at a price-earnings ratio of 44, which is 13% cheaper than its five-year average. But relative to the S&P 500, which trades at a price-earnings ratio of 28.7, this is not exactly cheap.

The good news is the stock trades at a price-sales ratio of 6, which is fairly valued relative to history.

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The GF Value calculator indicates a fair value of $170 for the stock, making it “modestly undervalued."

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2. Kraft Heinz

Kraft Heinz (KHC, Financial) is a blue chip processed food company that owns a variety of beloved brands such as Kraft, Heinz, Kool-Aid, Philadelphia, Maxwell House (Soup), Weight Watchers and more.

This is a defensive stock as people will always need to eat and many people get into habits with their shopping purchases. The company’s brands are also popular with kids in the U.S., therefore many families would likely be reluctant to switch to non-brand items.

The company has created “three pillars of growth” in its efforts to revamp its business: North America, Foodservice business and Emerging Markets.

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Consistent financials

Kraft Heniz reported revenue of $26 billion for the full year 2021, which has been pretty much flat over the past few years. In the third quarter of 2022, the company reported $6.5 billion in revenue, which beat analyst expectations by $214 million.

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The company’s annual net income has been around $1 billion over the past few years. In the third quarter of 2022, earnings per share was $0.35, which missed analyst expectations by $0.20. Net income declined by an eye-watering 41% vs. the prior-year quarter to $435 million. A silver lining is this was driven by “non-cash” impairment losses as the company did a $15.4 billion write-down of its brand value.

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The good news is the company has a strong dividend yield of 4.27%, which has been stable over the years. However, the company does have fairly high long term debt of $21 billion, which is substantial but not surprising given the company was created via a merger.

Guru Investments

Despite the underwhelming financials, Gates' foundation purchased 2.6 million shares of Kraft Heinz in the third quarter of 2022, during which the stock traded at an average price of $39 per share, which is close to where the stock trades at the time of writing.

Another guru who owns the stock is Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), which is the largest shareholder in the business, owning over 27% of the company.

The iconic investor Paul Tudor Jones (Trades, Portfolio) also added to his position in the third quarter of 2022.

Valuation

Kraft Heinz trades at a price-sales ratio of 14, which is 5% higher than its five-year average. The GF Value calculator also indicates the stock has a fair value of $35 per share, which means the stock is “fairly valued” at the time of writing.

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Final thoughts

Both Waste Connections and Kraft Heinz are defensive companies that were bought by the Gates foundation in the recently reported quarter. You can think of Kraft Heinz as being a food company and Waste Connections as a garbage company.

Kraft Heinz has consistent revenue but declining profitability and fairly high debt, thus it is not too great in my opinion. I think it needs to be more in tune with consumer tates. However, I personally think Waste Connections offers a decent value proposition overall.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure