One thing I like to keep an eye on as part of my investment research are 13F filings. These are quarterly reports that large money managers file to disclose their US stock holdings to regulators.
Recently, I was looking at the Q2 2022 13F filings for both Fundsmith LLP and Blue Whale Capital LLP. These firms run two of the UK’s most popular investment funds. And one thing stood out to me. Both have been buying the same beaten-up growth stock recently.
Fundsmith and Blue Whale: buying the same growth stock
The stock both UK money managers have been buying lately is Adobe (NASDAQ: ADBE), the technology company specialising in creative software (i.e. software for photo and video editing). It also offers marketing and data analytics software designed to help online shopping businesses enhance their offerings.
Last quarter, Fundsmith, whose flagship product Fundsmith Equity is managed by Terry Smith, bought 185,651 Adobe shares, increasing its holding by about 9.7%. Meanwhile, Blue Whale Capital, whose main fund Blue Whale Growth is managed by Stephen Yiu, picked up 10,500 shares, boosting its holding by about 10.6%.
It seems both money managers have seen some value here after the stock’s big pullback in 2022. Year to date, Adobe is down about 20%. However, at one stage it was down more than 35%.
A high-quality tech stock
It’s not hard to see why Smith and Yiu – who both like to invest in high-quality companies – have bought Adobe shares for their funds.
This company ticks a lot of boxes from a quality perspective. For starters, it has an excellent growth track record. Over the last five years, revenue has climbed from $5.9bn to $15.8bn. And looking ahead, the company should keep growing on the back of the growth in the digital content market (i.e. YouTube, TikTok, Instagram, etc.).
Secondly, it’s very profitable, with high gross margins and returns on capital. Companies with high gross margins are typically able to handle inflation better than companies with low gross margins. Meanwhile, companies with high returns on capital tend to generate strong growth in the long run.
On top of this, it’s a leader in its field with a strong brand, an excellent reputation, and significant pricing power.
Add in the fact that after its recent pullback it’s not particularly expensive (the P/E ratio is under 30) and it looks to have a lot of potential as a long-term investment.
Would I buy Adobe shares today?
Would I buy Adobe stock for my own portfolio today though? Yes, I would. This is a tech stock I like a lot. Especially now that it’s had a sizeable pullback and is trading at a reasonable valuation relative to its growth.
The stock is not without risk, of course. If growth shares experience another bout of weakness in the coming months, Adobe could deliver poor returns.
However, all things considered, I think the risk/reward proposition here is attractive right now.