Elon Musk Tweets How To Select Winning Stocks: Our Top Picks

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On May 2nd, 2022, the world’s richest man – Elon Musk – tweeted:

Since I’ve been asked a lot: Buy stock in several companies that make products & services that *you* believe in. Only sell if you think their products & services are trending worse. Don’t panic when the market does. This will serve you well in the long-term.

When the person with the most successful track record for amassing wealth in modern history speaks (tweets), it is probably prudent to listen and try to learn something. In this case, Mr. Musk clearly practices what he preaches. He has the vast majority of his net worth tied up in just a few businesses, such as Tesla (TSLA), SpaceX (private), and, most recently, Twitter (TWTR).

In fact, his wealth is so concentrated that he supposedly does not even own a home and has been reported to live at times below the poverty line. As a serial risk-taking entrepreneur who has put all of his wealth on the line in extremely risky enterprises that he truly believed in numerous times, Elon has shown by example that, by making extremely concentrated and bold bets on what you believe in, you can build an enormous fortune in a relatively short period of time.

While he is known for belittling Berkshire Hathaway’s (BRK.A)(BRK.B) Warren Buffett – who is widely regarded as the greatest investor in modern history – Musk’s stock picking advice is actually not that far removed from the wisdom espoused by great investors like Charlie Munger, Phil Fisher, Peter Lynch, Ben Graham, and even the Oracle of Omaha himself.

For example, Charlie Munger stated:

We’ve really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money’s been made in the high quality businesses. And most of the other people who’ve made a lot of money have done so in high quality businesses.

Phil Fisher said:

I believe that the greatest long-range investment profits are never obtained by investing in marginal companies

Peter Lynch – famous for his scuttlebutt investment style as espoused in his book “One Up On Wall Street,” where he detailed the premise that retail investors can outperform investment professionals by buying what they know – said:

Time is on your side when you own shares of superior companies.

Warren Buffett’s mentor Ben Graham said:

The risk of paying too high a price for good-quality stocks – while a real one – is not the chief hazard confronting the average buyer of securities. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Last, but not least, Warren Buffett said:

Generally speaking, I think if you’re sure enough about a business being wonderful, it’s more important to be certain about the business being a wonderful business than it is to be certain that the price is not 10% too high or 5% too high or something of the sort

Given that a business is really nothing more than a group of people dedicated to producing a product or service, if the product or service is great and the group of people producing it are not degrading its quality, then it is likely a great business. This means that Elon Musk’s advice essentially boils down to: buy what you know is great and monitor it to ensure it remains great. As long as this remains the case, hold the stock. Otherwise, sell it.

Given that Elon Musk’s stock picking advice jives so well with what the investing greats have to say, it clearly has a lot of merit to it. Of course, as Ben Graham pointed out, there is still a risk of paying too high a price for good-quality stocks, and even the best investors still select what they think are great businesses that wind up becoming poor investments (e.g., International Business Machines (IBM) for Warren Buffett).

With that in mind, here are two of the great businesses that we believe are on sale at the moment:

#1. Enterprise Products Partners L.P. (EPD)

EPD has generated total returns that have crushed its sector (e.g., ALPS Alerian MLP ETF AMLP) over time, while also generating extremely consistent double-digit returns on invested capital through energy sector booms and busts.

Data by YCharts

Meanwhile, management runs the business very prudently, maintaining the strongest balance sheet in the sector, investing in low risk, high return growth projects, and prioritizing investors by paying out a hefty and consistently growing distribution. Insiders are fully aligned with unitholders as they own almost a third of the partnership.

Last, but not least, the asset portfolio is well diversified and consists of strategically located, well-operated, and high quality assets that earn a Wide Moat rating from Morningstar.

Trading at a clear discount to its historical EV/EBITDA multiple, alongside a 7%+ distribution yield covered 1.8x by distributable cash flow and solid growth prospects, EPD looks undervalued at the moment.

#2. Blackstone Inc. (BX)

BX is another high quality business that has crushed the market (SPY) over the course of its publicly traded existence:

Data by YCharts

With hundreds of billions of dollars in alternative assets under management spread across a vast array of geographies and sectors, a very strong name brand and investor network that facilitates strong fundraising, a deep talent pool, substantial industry data that gives it an edge when investing, and a sparkling balance sheet and stellar credit rating, BX is a very well-run and lower-risk investment. On top of that, its capital-light business model enables it to generate stellar returns on capital, and it generates a lot of free cash flow that it passes on to shareholders via a generous dividend policy.

Thanks to a recent strong pullback in the share price, BX’s trailing twelve month dividend yield has reached 4.5% and the forward price to earnings ratio is 17.66x, which is a clear discount relative to its 3-year average of 22.32x. Earnings per share are expected to grow at a CAGR of 11% over the next half decade, which combines with the attractive dividend yield and strong business model and balance sheet to provide an exceptional risk-reward for investors.

Investor Takeaway

Elon Musk is apparently more than a highly successful tech entrepreneur turned tycoon and leading global figure. He also understands something fundamental to successful investing: filling your portfolio with high quality companies that you can understand enough to gauge the quality of their products/services on an ongoing basis.

Given that virtually all of the other great investors of the 20th/21st century agree with this approach, the prudent investor may want to take their advice. While we are not strict buy and hold investors at High Yield Investor and do our fair share of opportunistic capital recycling, we also like to anchor our portfolio with high quality businesses trading at discounts to our estimate of fair value and generally let them run.