Investors looking to beat the market could do worse than following the example of Daniel Loeb. The billionaire is the money manager for Third Point, the hedge fund he founded nearly thirty years ago. During that time, he turned $3.4 billion in seed money into a financial powerhouse with nearly $12 billion in assets under management.

Loeb has been called “one of the most successful hedge fund managers of his generation” by The Wall Street Journal, generating average annualized returns of 16% over the span of 28 years, beating the returns of the S&P 500 by nearly 6%.

The billionaire investor has long stressed investing in “high-quality companies trading at reasonable valuations” but doesn’t lose sight of “their prospective growth.”

With that as a backdrop, let’s look at two stocks Loeb bought in the second quarter.

Image source: Getty Images.

1. Apple

Third Point’s largest new position during the second quarter, by a fair margin, was Apple (NASDAQ: AAPL). Loeb bought 1.95 million shares of Apple worth roughly $411 million and representing nearly 5% of Third Point’s portfolio, making it his seventh largest stake.

Loeb addressed the acquisition at length in Third Point’s shareholder letter, noting he purchased Apple shares in April. A quick look at the stock chart reveals that the stock was selling for 26 times earnings, a discount to a multiple of 27 for the S&P 500 at the time. Indeed, Loeb noted Apple’s “relative multiple had compressed toward a multi-year low,” thanks in part to “several years of stagnant growth.”

The compelling valuation aside, Loeb cited several factors that made Apple an intriguing pick, including the company’s ecosystem of 2.2 billion active devices and market-leading positions in several form factors across numerous key markets.

He also noted investor fears that Apple would be an “artificial intelligence (AI) loser,” but the billionaire came to a different conclusion. Loeb believes the imminent release of Apple Intelligence — a host of user features steeped in generative AI — will drive “meaningful demand within Apple’s installed base.” He went on to posit this “AI-related demand could drive a step change in improvement in Apple’s revenue and earnings over the next few years.”

I think Loeb’s thesis is right on the mark. Apple’s revenue is up less than 1% for the first nine months of its 2024 fiscal year after falling 3% in fiscal 2023, thanks to weak iPhone sales. However, inflation fell to 2.9% in July, marking its lowest rate in three years. Improving prices will give consumers more discretionary income. Furthermore, Apple announced the date for its annual iPhone reveal, scheduled for Sept. 9, when the company is expected to provide details for an AI-powered iPhone. This will no doubt spark demand among the Apple faithful, fueling a booming upgrade cycle for the iPhone 16.

2. Taiwan Semiconductor Manufacturing

Third Point significantly increased its stake in Taiwan Semiconductor Manufacturing (NYSE: TSM), often referred to as TSMC, during the second quarter. Loeb bought an additional 850,000 shares of TSMC, increasing his total holdings to 2 million shares worth roughly $352 million and representing 4% of Third Point’s portfolio, making it his 10th largest position.

Loeb has been consistently increasing Third Point’s stake in TSMC since initiating the position in May of 2023. He noted the company is coming off its “worst year since the Global Financial Crisis,” making it a compelling opportunity. Loeb believes the combination of cyclical recovery and strong demand for AI will drive “substantial earnings growth for the company.”

TSMC occupies a unique position in the industry, according to Loeb, with a market share of more than 90% for “leading-edge semiconductor manufacturing,” which includes the chips used for AI. While AI currently represents a “relatively small percentage” of TSMC’s sales, he sees TSMC’s “AI revenue growing by multiples in the coming years.”

I think Loeb has hit the nail on the head. TSMC’s dominant market share of high-end processors makes it an odds-on favorite to benefit from these secular tailwinds. Furthermore, after suffering declines of more than 3% last year, the smartphone market has rebounded in 2024, expected to notch growth of nearly 6%, accoring to data supplied by market intelligence firm IDC. As one of the leading providers of smartphone chips, this return to growth will also boost TSMC’s results.

In the second quarter, TSMC’s revenue jumped 40% year over year, while earnings per share climbed 36%. Management expects its growth streak to continue, guiding for revenue growth of 34% in the third quarter. It’s worth noting that TSMC tends to issue conservative guidance, so the results could well be better.

The adoption of AI continues to gain steam, and estimates about the ultimate size of the market continue to ratchet higher. While estimates vary, the market for generative AI is expected to be worth between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company.

The economic recovery and adoption of AI will provide multiple tailwinds to drive TSMC higher.

Should you invest $1,000 in Apple right now?

Before you buy stock in Apple, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $731,449!*