3 of Joel Greenblatt’s top 5 stocks are S&P 500 ETFs. These are the 2 stocks that are not

The 2005 publication of Joel Greenblatt’s book “The little book that beats the market” made waves because it opened up a unique opportunity for investors. The investment strategies used by the renowned value investor were suddenly available for everyone to use and apply to their own portfolio.

As it approaches its 20th anniversary, the book is considered an investment classic, bringing down the curtain on some of the more complex investments on the market: mergers and acquisitions, spin-offs and restructurings. Greenblatt showed investors how to dissect them for profit.

Today Greenblatt works Gotham Asset Managementa hedge fund with $4.2 billion in assets under management. It is what you would call diversified. Gotham owns more than 1,400 shares. Not all are special situations.

In fact, three of the top five holdings in Gotham’s portfolio are exchange-traded funds (ETFs) that track S&P 500 index: SPDR S&P 500 ETF Trust (NYSEARCA:SPY), of Greenblatt Gotham Enhanced 500 ETF (NYSEARCA:GSPY) and iShares Core S&P 500 ETF (NYSEARCA:IVV).

The other two positions are mega-cap stocks that are not subject to a restructuring, merger or even a spin-off. It was strong action that drove the market higher. Let’s see why they like them so much.

Key points about this article:

• Billionaire investor and author Joel Greenblatt has opened the eyes of millions of investors to the rich opportunities to be found in special situation investing through his book “The little book that beats the market.”
• With $4.2 billion in assets under management, Gotham Asset Management owns more than 1,400 shares. Its top holdings are mostly index-tracking ETFs. The only two stocks in the top five holdings are discussed in detail below.
• If you’re looking for action with huge potential, be sure to grab our free copy brand new “Next NVIDIA” report.. It has a software stock where we are sure it has 10x potential.

Nvidia (NVDA)

While it’s not the same crazy stock it has been for the past couple of years, the maker of artificial intelligence chips Nvidia (NASDAQ:NVDA) remains a massive growth vehicle. Its AI-enhanced graphics processing units (GPUs) still own the high-computing data center market, and its rivals remain a generation or two behind.

However, having come this far, so fast, NVDA stock doesn’t come cheap. Even with the stock down 10% from its all-time high, Nvidia is trading at 60 times trailing earnings, 31 times next year’s estimates and an incredibly high 32 times sales. There’s a reason two dozen money managers have either halved their exposure to the chip maker or sold out entirely.

But not Greenblatt. As a true value investor, he is contrarian. And when everyone was rushing for the exits, Gotham Asset Management came running. It has strengthened its already considerable position with another huge acquisition. Greenblatt purchased nearly half a million more shares, a 46% increase in total, bringing the stake to 1.53 million shares. Valued at $192.5 million, Nvidia is the third largest holding in the portfolio or 2.5% of the total.

Appreciating Greenblatt’s support for the stock, Nvidia nearly doubled its value from Gotham’s average purchase price of $61 per share. Even since its recent acquisition, which is priced at nearly $107 per share, NVDA stock is still up more than 18%.

Microsoft (MSFT)

The second largest individual stock holding in Greenblatt’s top five positions is Microsoft (NASDAQ:MSFT). The money manager owns 213,390 shares after growing its stake by 10% in the second quarter by purchasing nearly 21,000 additional shares at an average cost of $434 per share.

Since that’s well above the $171 per share price for all of its purchases, valuing its holdings at nearly $94 million, it suggests that Greenblatt still sees significant upside potential for the tech giant. That’s not a popular view on Wall Street billionaires were dumping stock in bulk in the second quarter, however, the implementation of AI in Microsoft’s suite of products and services helped to overstock the stock.

MSFT shares have risen 39% over the past year as its Azure cloud services business has been particularly strong. Segment revenue rose 29% in the second quarter to $28.5 billion, giving Azure a 23% market share.

Microsoft is a much different company today than it was even a decade ago. AI has infused the tech stock with a new relevance it hasn’t seen in a long time. While it will ultimately come down to whether its customers can squeeze out the cost-effectiveness of AI technology to justify the costs, right now Microsoft is enjoying a growth phase that should be sustainable for some time.

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