Billionaire Bill Gates has 54% of his trust invested in 2 genius stocks

The Bill & Melinda Gates Foundation (BMGF) is involved in various philanthropic activities around the world, from improving health systems and promoting education to fighting poverty and inequality. Since its inception, the organization has paid out more than $77 billion in grants.

The foundation’s charitable donations are funded by the BMGF Trust, which holds and invests the donated money. As of June 2024, the trust had $48 billion spread across 23 positions, but 54% of the portfolio was allocated to two stocks: 33% in Microsoft (MSFT 0.97%) and 21% in Berkshire Hathaway (BRK.A 1.85%) (BRK.A 1.85%).

Incidentally, the BMGF Trust beat Mr S&P 500 (^GSPC 1.01%) by 10 percentage points in the last three years. This performance was largely due to his substantial positions in Microsoft and Berkshire Hathaway. Moreover, the current asset allocation suggests that Bill Gates (Board Co-Chairman) still has confidence in both stocks.

Here’s what investors should know.

Microsoft: 33% of the Bill & Melinda Gates Foundation Trust

Microsoft is the largest software company in the world. It has a particularly strong presence in the business productivity and enterprise resource planning sector with its Office and Dynamics products respectively. Microsoft has added generative artificial intelligence (AI) co-pilots to both ecosystems to create new monetization opportunities. Copilot customers grew sequentially by over 60% in the June quarter.

Additionally, Microsoft Azure is the second largest public cloud. The company has a strong presence in several cloud verticals, including cybersecurity, database management systems and hybrid computing. In addition, research company Gartner recently named Microsoft a leader in data science and machine learning platforms, and Azure secured an early push in generative AI development services thanks to its partnership with OpenAI.

Given these strengths, Morgan Stanley analysts believe Azure could outperform Amazon Web Services (AWS) as the leading public cloud by 2027. Microsoft actually lost two percentage points of market share (sequentially) in the June quarter, while AWS and AlphabetGoogle Cloud gained one percentage point apiece. But Microsoft CFO Amy Hood noted that demand for AI services has outstripped capacity, so the market share losses could be temporary while the company builds out its infrastructure.

Microsoft reported better-than-expected financial results in the fourth quarter of fiscal 2024 (ended June 30). Revenue rose 15% to $64.7 billion and GAAP net income rose 10% to $2.95 per diluted share. The top line grew faster than the bottom line, as the recent Activision acquisition added about three points to revenue growth and subtracted about two points from operating income growth.

On a less upbeat note, Azure revenue missed estimates in the fourth quarter and management provided worse-than-expected guidance for the first quarter of fiscal 2025. That sent shares down about 5% after report, and stocks have yet to fully recover.

Going forward, Wall Street expects Microsoft’s earnings to grow 15% annually through 2027. That makes the current valuation of 35.3 times earnings look relatively expensive. Investors should be cautious right here. Personally, I would feel more comfortable buying Microsoft stock if it were 15% cheaper, somewhere around $360 per share.

Berkshire Hathaway: 21% of the Bill & Melinda Gates Foundation Trust

Berkshire Hathaway is a holding company that owns a diverse group of subsidiaries, the most important of which are its insurance businesses. Berkshire first entered the insurance industry when it acquired National Indemnity in 1967, moving away from its core textile business. The company has since become the world leader in insurance fleet, a term that refers to insurance premiums paid to Berkshire that have not yet been paid in claims.

CEO Warren Buffett says the company paid “less than nothing” to build up the fleet thanks to its disciplined underwriting, meaning premiums earned generally exceeded the cost of paying claims. In fact, Berkshire achieved a combined ratio of 87% in the second quarter, well below the industry average of 101.5%. Values ​​below 100% correspond to profitable underwriting, so Berkshire’s underwriting is much better than average.

Warren Buffett and fellow investment managers Todd Combs and Ted Weschler have invested this fleet to great effect over the years. Berkshire had $235 billion in U.S. Treasury bills and $285 billion in equity securities (stocks) on its second-quarter balance sheet. That sizable investment portfolio has helped book value per share grow 10.4% annually over the past three years, outpacing the S&P 500’s 8.3% annual gain.

Berkshire Hathaway posted a solid financial performance in the second quarter. Revenue rose 1.2 percent to $93.7 billion, and operating earnings (which exclude gains and losses on stocks) rose 16 percent to $11.6 billion.

Going forward, Wall Street expects operating earnings to grow 17% annually through 2027. That consensus estimate makes the current valuation of 24 times operating earnings look reasonable. Investors should consider buying a short position, especially if they are looking for an excellent defensive stock. Berkshire has outperformed the S&P 500 in the past six recessions by an average of 4.4 percentage points, according to Bespoke Investment Group.