George Soros just bought these 3 stocks. Should you invest in them too?

Following big investors can be beneficial because this approach gives us some insight into what stocks might be good to buy now. However, it is important to remember that investors still have to do their own homework. As for George Soros, his private firm, Soros Fund Management, manages just over $5 billion in assets. We will focus in this article on three stocks in which Soros increased his position in 2Q.

92-year-old George Soros

Securities and Exchange Commission rules mandate that mutual funds that manage assets in excess of $100 million and include exchange-traded funds must disclose their holdings each quarter in a form called a Form 13F. This report is intended to promote transparency about what different funds are doing, but it has the added benefit of allowing investors to see what top-level investors like Warren Buffett or George Soros are doing with the capital they manage.

Soros Fund Management and its strategy

George Soros runs Soros Fund Management, a private firm that manages a little over $5 billion in assets and the fund's largest stake is in electric vehicle manufacturer Rivian (although it reduced its stake in the company by 10% this quarter). He founded the firm in 1970 and in 2010 it was reported as one of the most profitable firms in the hedge fund industry, with an average annual rate of return of 20% over four decades.

Soros has earned a reputation as a contrarian investor. Essentially, he does what everyone else doesn't because he believes the market does not accurately represent the true value of a company or commodity. If you believe that markets are rational and all information is known, then you are in direct opposition to Soros' beliefs. While he famously made billions in currency trades, he also has significant investments in stocks. While not every trade he has made has worked out, Soros' track record is impressive enough (his Quantum fund returned 30% per year from 1969 to 2000).

Should investors follow Soros' lead and buy the following three stocks? Let's find out why he chose these companies.

1. Alphabet

During a recession, advertising spending is often the first expense that businesses cut. The economic downturn so far in 2022 has led to fears of a drop in spending, causing Alphabet stock $GOOG, $GOOGL to suffer this year. Where others shunned the stock in fear, Soros saw an opportunity to buy. While he only increased his position by 10%, it is still one of his largest positions and makes up 2.06% of his portfolio.

GOOG stock has written down over 23% in the past year

During Q2, investors were able to buy Alphabet stock at less than 20 times earnings - a valuation rarely seen in a tech giant. The short-term pessimism the stock faced made it a great buying opportunity for long-term investors.

The Internet giant completed a 20-for-1 stock split of Alphabet in 2Q after the market closed on July 15. Alphabet also reported June revenue and earnings that fell short of Wall Street's targets as YouTube and its cloud computing fell short of expectations. But Google's core digital advertising business still posted resilient 14% growth, reinforcing the notion that companies need to advertise on Alphabet's platform no matter how bad the economy gets.

Once the economy recovers, however, ad spending will rebound and Alphabet will benefit greatly. George Soros is betting on this rebound, and anyone who buys Alphabet stock is counting on it.

2. Amazon

Amazon $AMZN is Soros' second largest holding, as it now makes up 3.8% of his investment portfolio. It increased its stake by 41% in the second quarter, so this was no small purchase. So what did he see in Amazon during Q2? It was probably the depressed Amazon stock price. Amazon shares were trading at their lowest since the pandemic began during this period, and Soros took this opportunity to increase his position.

annual chart of AMZN stock

When virtually anyone hears the name Amazon, they immediately think of its flagship online store. According to eMarketer estimates, Amazon is on track to bring in about $0.40 of every $1 in online retail spending in the U.S. this year.

But what makes Amazon a true leader is more likely the company's significantly higher-margin segments, such as subscriptions, advertising and cloud infrastructure services, which could more than triple its operating cash flow by the middle of this decade.

Amazon Web Services (AWS) is the global leader in cloud market share. According to a Canalys report, AWS accounted for an estimated 33% of global cloud services revenue during the first quarter. Cloud growth is still in its infancy, and more importantly, generates significantly higher margins than online retail sales. As AWS grows into a larger percentage of Amazon's net sales, it will have a disproportionately larger positive impact on the company's operating cash flow.

Then if you believe Amazon and its e-commerce business can recover, the stock can still be had at a nearly 30% discount to its all-time high.

3. Salesforce

Of the three companies discussed today, Salesforce $CRM makes up the smallest position in Soros' portfolio (1.84%). And yet, Soros increased its position in Salesforce by 138% during the quarter. That's a lot to be confident about.

CRM stock is down nearly 38% over the past year

The buybacks were likely due to Salesforce's relatively low valuation. The only other time CRM was cheaper was during the height of the Great Recession in 2009, and anyone who bought shares then has done pretty well since then.

The cloud-based software company's 2Q revenue rose 22% year-over-year (26% at constant currency) to $7.72 billion, beating analysts' estimates by $20 million. Its adjusted net income fell 15% to $1.19 billion, or $1.19 per share, but still cleared the consensus forecast by $0.19.

Salesforce, however, provided a weaker-than-expected forecast for the rest of the year. It expects its third-quarter sales to grow 14% year-over-year and 17% for the full year. Analysts had expected 18% growth in the third quarter and 20% growth for the full year. On a positive note, the company announced a $10 billion stock buyback.

Should you follow Soros and invest in this stock as well?

Of the three, Alphabet appears to be the best buy as it is now trading just a few one percent units away from 52-week lows with an enticing earnings multiple of just under 22. However, the other two are also excellent stocks and should be considered.

Regardless of what great investors like Soros do, investors still need to do their own analysis on each company as everyone has different investment objectives. Blindly following one investor is a surefire way to get yourself into trouble. But checking what funds are doing is a great way to generate ideas for potential stock picks.

DISCLAIMER: All information provided here is for informational purposes only and is in no way an investment recommendation. Always do your own analysis. This article was largely inspired from analyst Keithen Drury.