One great way to learn how to become a better investor is to watch how the best in the business invest their money. By taking a closer look at what they're buying, investors can see what attracted them to these stocks. They can then apply their learnings to improve their own stock-picking process.
Three stocks that some of the top investors in the world are buying these days are small-cap biotech Axsome Therapeutics (NASDAQ: AXSM), e-commerce giant Amazon (NASDAQ: AMZN), and Canadian utility TransAlta (NYSE: TAC). Here's what they see in this trio of stocks.
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Biotech's brightest star
George Budwell (Axsome Therapeutics): This year, several of Wall Street's top investors have been buying large chunks of Axsome Therapeutics, a clinical-stage biotech developing novel treatments for central nervous system disorders. In the most recent quarter, for example, Julian and Felix Baker of Baker Bros. Advisors, as well as Kenneth Griffin of Citadel Advisors, bought sizable stakes in this small-cap biotech. Not surprisingly, this surge of interest from Wall Street's super-investor class has coincided with a sharp rise in Axsome's share price in 2019. At its peak, the biotech's shares had risen by a staggering 750% over just the first five months of 2019.
What's all the fuss about? Axsome has two high-value drug candidates in late-stage development -- each of which could produce blockbuster-level sales. The company's lead candidate, AXS-05, is being developed as a first-in-class treatment for treatment-resistant depression, major depressive disorder (MDD), agitation associated with Alzheimer's disease, and smoking cessation. The drug was granted fast track status by the Food and Drug Administration for its treatment-resistant depression and agitation associated with Alzheimer's disease indications, and breakthrough therapy designation for MDD. These coveted regulatory designations could speed up the drug's regulatory review in a big way -- that is, in the event that it succeeds in late-stage testing.
In addition, Axsome hopes to throw its hat into the high-value migraine market soon with its candidate AXS-07. The migraine headache space has seen a number of recent drug approvals, but that doesn't mean that AXS-07 can't carve out a profitable niche in this multibillion-dollar-a-year space if its late-stage trial goes as planned.
Should retail investors also buy into this compelling growth story? The long and short of it is that Axsome's near-term fate depends entirely on the clinical success of AXS-05 and AXS-07. The trial data so far have been encouraging for both drugs, but this is a risky growth play nonetheless. Therefore, retail folk may not want to go hog wild with this prerevenue biotech stock just yet. A smallish position might be a good idea based on how this story is unfolding, but this developmental biotech stock arguably shouldn't make up a disproportionate amount of your portfolio at this stage. Clinical trials, after all, are an inherently risky endeavor.
The Oracle eyes Amazon
Rich Duprey (Amazon.com): When Warren Buffett speaks, people listen, and when he opens his wallet to buy a stock, legions of investors follow suit. While running like lemmings anytime any guru makes a move is not smart, when Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) buys stock in Amazon.com (NASDAQ: AMZN), there's good reason to take notice.
First, a caveat. It wasn't Buffett himself who made the purchase, but rather one of his two other investment managers, Ted Weschler and Todd Combs. Still, Buffett himself has said he admires Amazon and made a mistake in not buying it before.
The most recent SEC filing by Berkshire shows the holding company bought over 483,000 shares at a value of more than $860 million. It's a sizable investment, but not nearly one of the portfolio's biggest (that would be Apple at around $46 billion). Yet there are a number of good reasons why it should be in Berkshire Hathaway's portfolio, and perhaps yours.
Amazon, of course, is the dominant e-commerce platform accounting for a third of all online retail transactions in 2018, but the cloud computing platform Amazon Web Services is where the real profitable action is. AWS is becoming a larger percentage of Amazon's total sales, and it offers much higher profit margins.
Amazon is also becoming a potent advertising force as ad managers switch hundreds of millions of dollars to Amazon from current leaders Google and Facebook. The threat has Google responding by showing more shopping ads across its platform in a bid to undercut Amazon.
The e-commerce giant is a massive enterprise that touches virtually every aspect of our life and shows no signs of curtailing its reach. It remains an innovative leader and a smart tactician in taking on adversaries. Buffett's purchase of Amazon.com, even if it was done by his lieutenants, is worth noting and perhaps even emulating.
Image source: Getty Images.
Some of the world's smartest energy investors are battling for the upside of utility
Matt DiLallo (TransAlta): Canadian utility TransAlta has caught the attention of some of the world's top energy investors in recent months. Earlier this year, a group of investment funds increased their stake in TransAlta to more than 10% to press the company to make changes. Among the funds involved in that partnership was one managed by Bluescape Resources, led by longtime energy industry investor John Wilder.
In addition to that, Brookfield Renewable Partners (NYSE: BEP), the renewable-focused investment arm of leading asset manager Brookfield Asset Management, made a big bet on TransAlta. Brookfield Renewable will invest 750 million Canadian dollars ($569 million) into the company to help it transition to clean energy by 2025. In addition to that direct investment in TransAlta's hydro assets, Brookfield Renewable agreed to buy enough shares on the open market over the next two years to increase its stake in the company from 4.9% up to 9%.
The reason these smart investors are buying shares of TransAlta is that they believe it's significantly undervalued. While the two groups don't agree on the best path to unlock the value of the company -- one of the funds even sued Brookfield to stop its deal -- they both believe that TransAlta could have significant upside if it makes changes. That battle of the energy-investing titans makes it an interesting stock to watch these days.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. George Budwell has no position in any of the stocks mentioned. Matthew DiLallo owns shares of Amazon, Apple, Berkshire Hathaway (B shares), Brookfield Asset Management, Brookfield Renewable Partners L.P., and Facebook and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, and Facebook. The Motley Fool recommends Berkshire Hathaway (B shares) and Brookfield Asset Management. The Motley Fool has a disclosure policy.