2 Genius Stocks That Billionaire Bill Ackman Just Loaded Up On

Keeping tabs on where billionaire investors are putting their money is a good idea. While you shouldn't blindly follow their moves, their holdings can be a great source of inspiration for retail investors.

One popular billionaire to follow is Bill Ackman, who has had a strong track record of success at his hedge fund, Pershing Square Capital Management.

Ackman keeps a fairly concentrated portfolio, so when he takes a position, investors should pay attention. During Q1, he sold a number of stocks, but he bought only two: Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT). These both look like smart stock picks, but are they still good buys?

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1. Amazon

During Q1, Ackman added about 1.8 million shares to Pershing Square's position. That increased the fund's ownership stake in the tech giant by 19%. It's Pershing's second-largest holding and, as of the end of the quarter, represented over 17% of the total portfolio value.

However, the information regarding Ackman's trades was made available through the Form 13F he filed on May 15, but that form reflects what the positions were as of March 31. Amazon has risen by nearly 30% since April 1, so the stock is no longer the value it was. But has it risen too much?

The primary investment thesis behind Amazon's stock centers around the company's cloud computing business, Amazon Web Services (AWS). Numerous AI firms are using it to get the computing power they need. Demand is so high that Amazon plans to spend $200 billion on capital expenditures this year alone, largely for data centers. These major investments will pay off if AI demand persists.

Amazon's stock is best valued in relation to the company's operating cash flow, which measures specifically how much cash the company generates from its businesses, rather than measuring it based on total earnings, a figure that can be affected by things such as changes in the values of investments or hefty depreciation costs.

AMZN Price to CFO Per Share (TTM) data by YCharts.

In Q1, Amazon sank to its lowest price-to-operating-cash-flow ratio in a decade. That was the perfect time to scoop up shares, but even after its rally since the end of Q1, the stock is still well within its normal valuation range by that metric. Because of that, I think that investors can still confidently buy Amazon's stock now.

2. Microsoft

Microsoft was Ackman's new position this quarter, and he took a major swing at the stock. He bought more than $2 billion worth of Microsoft, and it now accounts for about 15% of the portfolio. Although Microsoft's stock has rallied since the end of Q1, it's nowhere near Amazon's level. It's up about 13% since April 1, so there could still be plenty of value for new buyers to squeeze out of the stock.

MSFT Price to CFO Per Share (TTM) data by YCharts

On a price-to-operating-cash-flow basis, Microsoft is actually cheaper than Amazon, and well below its typical valuation. Of the two, Microsoft looks like the better bargain based on historical patterns.

If you zoom in on each company's latest results, Microsoft also looks a bit stronger. Overall, Microsoft's revenue rose 18% in its last quarter, compared with Amazon's 17% gain.

Perhaps the most important comparison is each company's cloud computing business. Both companies are spending hundreds of billions of dollars to expand their data center operations, and investors want to see strong growth for these major investments. Amazon Web Services' revenue rose 28% year over year, while Microsoft Azure's top line rose 40%.

Microsoft is both cheaper and growing faster, making it the better buy. However, Amazon is still a solid stock pick in its own right. Ackman buying both backs this up, and investors shouldn't hesitate to buy either one right now.

Keithen Drury has positions in Amazon and Microsoft. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool has a disclosure policy.