Hedge Funds' 25 Top Blue-Chip Stocks to Buy Now
Hedge funds historically have loaded up on blue-chip stocks, and that's still true today. Here, we examine the smart money's favorite stock picks and what makes them so attractive.
A good, old-fashioned investor panic that punished even solid blue-chip stocks led investors to pull money out of hedge funds like crazy earlier this year. But now it appears that the good times are rolling again.
The benchmark Eurekahedge Hedge Fund Index is sporting a five-month trailing return of almost 13% since March. That includes a 1.9% improvement in August. It's little wonder, then, that net inflows to hedge funds increased by nearly $18 billion last month.
If hedge funds are bullish on a recovery in both the economy and equity markets, it's not a bad idea to see how the so-called smart money is positioning itself for those bets. To get an idea of what hedge funds are holding these days, we turned to WhaleWisdom, where we were able to determine hedge funds' favorite names based on the number of funds holding a position in any given stock.
Big, blue-chip stocks are unsurprisingly over-represented on the list. Indeed, of the 25 most popular hedge fund stocks, 10 are components of the Dow Jones Industrial Average. Partly that's a function of their massive market capitalizations and attendant liquidity, which creates ample room for big institutional investors to build or sell large positions.
In plenty of other cases, however, hedge funds are betting on some of today's hottest growth stocks.
Have a look at hedge funds' 25 favorite blue-chip stocks to buy now. All these names likely appeal to the smart money because of their size, strong track records or outsized growth prospects, but we'll delve into a few specifics that make each pick special.
Data is as of Sept. 16, unless otherwise noted. Companies are listed in reverse order of popularity with hedge funds, according to WhaleWisdom. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts’ ratings provided S&P Capital IQ.
25. Berkshire Hathaway
- Market value: $524.7 billion
- Dividend yield: N/A
- Analysts' opinion: 1 Strong Buy, 0 Buy, 3 Hold, 0 Sell, 0 Strong Sell
Berkshire Hathaway's (BRK.B, $219.59) appeal for the hedge fund crowd is obvious. Warren Buffett's conglomerate has been one of the best long-term investments of all time.
Think of it as a case of "if you can't beat 'em, join 'em."
Berkshire is underperforming the S&P 500 this year, with a decline of 3.1% to the index's 4.8% gain. However, Buffett's record going up against the broader market over long periods of time is second to none. So what could make a hedge fund manager's life easier than essentially offloading some of his or her work to Uncle Warren?
Under the direction of Buffett and partner Charlie Munger, Berkshire Hathaway created almost $356 billion in wealth from 1976 to 2016, good for an annualized return of 22.6%. Berkshire Hathaway ranks among the top 50 stocks of all time, too.
Although insurance is the cornerstone of Berkshire's business, scores of wholly owned subsidiaries like BNSF Railway, as well as stakes in blue-chip stocks from Apple (AAPL) to American Express (AXP) to Coca-Cola (KO), make BRK.B shares a diversified bet on the broader economy. More recently, however, Buffett has come out of his shell a bit, making uncharacteristic investments in a gold miner and a cloud-infrastructure initial public offering (IPO).
Just don't ask the analysts what they think. Only four cover the B Class shares and just three track the A Class shares. For what it's worth, the B shares have one Strong Buy call and three Holds.
24. Home Depot
- Market value: $303.2 billion
- Dividend yield: 2.1%
- Analysts' opinion: 13 Strong Buy, 8 Buy, 10 Hold, 0 Sell, 1 Strong Sell
Turns out, HD also is a good way to play COVID-19.
As an essential business, Home Depot was allowed to be open during lockdowns. And even though strict lockdowns have been lifted, hordes of people are spending much more time at home, be it for work, school or a lack of anyplace else to go.
"We believe that sheltering-at-home has given consumers the time and inclination to take on small home improvement projects," says Argus Research's Chris Graja, who rates the stock at Buy. "HD is a potential beneficiary if consumers reallocate a portion of their spending from traveling and eating out to working, relaxing and studying in a safe comfortable home and yard."
HD also could be a beneficiary of greater attention to cleaning and disinfecting, Graja notes, even after the pandemic is under control. With its massive market capitalization, this blue-chip stock is a no-brainer for a wide range of institutional investors.
23. American Express
- Market value: $85.3 billion
- Dividend yield: 1.6%
- Analysts' opinion: 8 Strong Buy, 3 Buy, 15 Hold, 2 Sell, 1 Strong Sell
American Express (AXP, $105.98) has been one of Warren Buffett's favorite blue-chip stocks since the 1960s, and there's little wonder why. Its total return comes to roughly 1,070% over the past quarter-century, and its future growth prospects remain solid.
"Credit quality still looks pretty good for AXP as loan balances are stable," says Piper Sandler's Christopher Donat, who rates shares at Overweight (equivalent of Buy). "The value of loans has been stable around $50B since April. … We do not believe that temporary relief programs are distorting the data."
AXP's post-pandemic potential is further evidenced by analysts' long-term growth forecast. Wall Street expects the credit card company to generate average annual earnings growth of 13% over the next three to five years. That's a robust and enviable rate for a company as large as American Express.
With its stellar long-time track record and status as a massive Dow stock, it makes sense that hedge funds gravitate toward AXP.
- Market value: $106.4 billion
- Dividend yield: N/A
- Analysts' opinion: 9 Strong Buy, 4 Buy, 18 Hold, 1 Sell, 2 Strong Sell
Shares of Shopify (SHOP, $885.18), a multinational e-commerce company, have gone gangbusters since their 2025 initial public offering. Back then, the stock priced at $17 a share. Today it has $1,000 a share in its sights and it's as hot as ever.
Indeed, the pandemic-led rise in e-commerce has helped SHOP jump more than 125% so far this year. That kind of run presents an almost irresistible lure for big-money momentum investors.
Better-than-expected second-quarter results only added fuel to the SHOP rocket.
"Shopify was pricing in a pretty epic beat, and boy, did the firm deliver," says Canaccord Genuity analyst David Hynes Jr., who rates shares at Hold. "Either way, what was strikingly clear from this report is that commerce has shifted online in a major way, a trend that may normalize but is unlikely to reverse, and Shopify is clearly the leader in the space."
The bull case, as Canaccord lays it out, is based on the company's market-share gains, expansion of categories of goods offered on its platform and growth in the e-commerce market.
E-commerce sales are expected to surpass $1 trillion and represent 18.1% of total U.S. retail sales – up from 11% in 2019 – by 2024, according to eMarketer, so SHOP is an easy-to-understand growth play.
"This is going to be a fun one to watch," Hynes adds.
- Market value: $146.9 billion
- Dividend yield: 0.4%
- Analysts' opinion: 13 Strong Buy, 4 Buy, 1 Hold, 0 Sell, 1 Strong Sell
Danaher (DHR, $207.05) is a sprawling conglomerate that supplies everything from medical diagnostics to industrial products under brands such as Beckman Coulter, Sciex and Cepheid. And this lesser-discussed blue-chip stock has become popular with hedge funds as a coronavirus play.
"We believe that future revenue opportunities associated with COVID-related vaccines and therapeutics could add upside to our estimates, and these opportunities may account for some of the current additional premium in the valuation multiples," says William Blair equity research analysts Brian Drab and Joe Aiken, who rate the stock at Outperform.
Zacks notes that DHR can be a good investment option for investors seeking exposure in multiple sectors, and demand for molecular diagnostics and acute care diagnostics products are likely to be strong. "Its strong fundamentals and growth prospects are compelling," Zacks says.
Analysts are bullish to the tune of 13 Strong Buy ratings, four Buy ratings, one Hold recommendation and one Strong Sell call. The expect the company to deliver average annual earnings growth of more than 12% for the next three to five years.
20. Johnson & Johnson
- Market value: $390.7 billion
- Dividend yield: 2.7%
- Analysts' opinion: 8 Strong Buy, 4 Buy, 5 Hold, 1 Sell, 0 Strong Sell
Johnson & Johnson (JNJ, $148.40) is a must-have blue-chip holding in any large-cap health care fund.
J&J, another component of the Dow Jones Industrial Average, operates in several different areas of health care, including pharmaceutical products and medical devices. The company is best-known, however, for its over-the-counter consumer brands including Listerine mouthwash, Tylenol pain reliever and Johnson's Baby Shampoo.
Stifel analyst Rick Wise says that although the pandemic affected sales of medical devices, the division was surprisingly resilient. He's also bullish on JNJ's progress on COVID-19 vaccine development and manufacturing capabilities.
"Ahead of schedule, a U.S. Phase-3 trial is expected to commence in late-September," adds Wise. "As well, JNJ is targeting 1 billion-plus dose manufacturing capabilities by year-end 2021."
Meanwhile, Johnson & Johnson's pharmaceutical division has held up well. Credit Suisse's Matt Miksic, who rates the stock at Outperform, notes that better-than-expected growth in Stelara, Opsumit and Erleada, as well as slower-than-expected declines in Zytiga, are boosting the company's U.S. pharmaceutical sales.
Hedge funds also like the company's commitment to delivering income to investors. JNJ has suspended share repurchases to support the dividend, which continues to grow. The company announced a dividend hike in April, to $1.01 per share from 95 cents. That marked Johnson & Johnson's 58th consecutive year of dividend increases.
19. Thermo Fisher Scientific
- Market value: $171.6 billion
- Dividend yield: 0.2%
- Analysts' opinion: 13 Strong Buy, 3 Buy, 3 Hold, 1 Sell, 0 Strong Sell
Thermo Fisher Scientific (TMO, $433.88), the world's largest maker of scientific instruments, finds itself back in the 25 most popular hedge fund stocks, helped by big purchases on the part of Viking Global Investors and Epoch Investment Partners, among other investors.
The fundamentals look compelling too, given TMO's vast portfolio of laboratory equipment, applications and techniques it provides to the pharmaceutical and biopharmaceutical industries. It's not for nothing that the company is known as the "Amazon of Life Science Tools."
"We see Thermo as the best combination of solid growth and reasonable valuation in the group," says a team of Stifel analysts, who put a Buy rating on shares. "Thanks to top-notch execution on internal improvement efforts and M&A, the company now has as much organic growth potential in a 'normalized' year as any company. Thermo's ability to be a key supplier of COVID solutions and proven consistency in the face of macro uncertainty continues to position the stock well."
Shares are up by more than a third year-to-date and have room to run if the growth forecast is on target. Earnings are projected to expand at an average annual rate of 12.5% over the next three to five years, according to S&P Capital IQ, which makes the valuation – TMO trades at 25 times 2021 earnings – plenty reasonable among blue-chip stocks. At least in this market.
- Market value: $218.2 billion
- Dividend yield: 3.2%
- Analysts' opinion: 10 Strong Buy, 7 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Coca-Cola (KO, $50.79), with its massive market cap and membership in the Dow Jones Industrial Average, is an obvious holding for any big pool of money looking for exposure to the consumer staples sector.
Additionally, it has the imprimatur of Warren Buffett (a shareholder since 1987). And then there's the fact that it's an equity income stock like few others. The company has paid a quarterly dividend since 1920, and that dividend has increased annually for the past 58 years. KO last lifted its dividend in February, when it declared a quarterly payout of 41 cents a share, up from 40 cents a share.
The shutdown of restaurants, bars, movie theaters and sporting venues has hurt revenue, but the long-term strategy remains sound. With the U.S. market for carbonated beverages on the decline for more than a decade, Coca-Cola has responded by adding bottled water, fruit juices and teas to its product lineup to keep the cash flowing. In addition to the namesake Coca-Cola brand, KO also sports names such as Minute Maid, Powerade, Vitaminwater and Costa Coffee. And this year, Coca-Cola launched a namesake brand of energy drinks and Aha sparkling water.
Then there's the case for owning the bluest of blue-chip stocks.
"Historically, periods of severe stock-market turbulence have proven to be good times for investors with a longer-term time horizon to focus on the highest-quality and financially strongest names," says Argus Research's Chris Graja, who rates KO at Buy. "We believe that Coca-Cola is one of these companies."
17. JPMorgan Chase
- Market value: $303.8 billion
- Dividend yield: 3.6%
- Analysts' opinion: 10 Strong Buy, 7 Buy, 8 Hold, 0 Sell, 1 Strong Sell
As the nation's largest bank by assets – and a component of the Dow Jones Industrial Average – JPMorgan Chase (JPM, $99.70) exerts a strong pull on large institutional investors like hedge funds.
Not all big investors are bullish, however. Warren Buffett's Berkshire Hathaway cut its stake in JPM by 35.5 million shares, or 61% of the position, in the second quarter following a 1.8-million share (3%) trim during Q1 2020.
The economic downturn and high unemployment rate are pressuring stocks in the financial sector, but some analysts say the impact on JPMorgan shares is overdone. Piper Sandler's Jeffery Harte, who rates JPM at Overweight, says, "We continue to believe JPM is poised to be a relative outperformer whether the operating environment continues to rebound (favorable business mix and market leading position) or enters a 'double-dip' recession (the 'strong get stronger' in a difficult operating environment)."
And Deutsche Bank upgraded the bank to Buy from Hold in early September as part of an improved outlook for the nation's biggest banks.
Analysts project JPM to deliver average annual earnings growth of 8% over the next three to five years, according to S&P Capital IQ.
- Market value: $213.8 billion
- Dividend yield: 2.0%
- Analysts' opinion: 17 Strong Buy, 7 Buy, 9 Hold, 0 Sell, 0 Strong Sell
Analysts and hedge funds like cable giant Comcast (CMCSA, $46.81) as a class in itself. That's because its combination of content, broadband, pay TV, theme parks and movies is unparalleled by rivals, and gives this blue-chip stock a huge strategic advantage.
The diversification has come in handy this year as the pandemic has walloped theme parks, movies and spending on advertising. Deutsche Bank's Bryan Kraft, who has CMCSA at Buy, notes that strength in broadband subscriber growth, cable margins and cable capital intensity led the way for the company in Q2.
"On top of this: the results and outlook proved to not be as bad as expected in business services, advertising (both cable and NBCU), filmed entertainment, theme parks (although still under tremendous pressure), and Sky," Kraft adds.
Analysts tilt heavily toward Strong Buy and Buy calls on CMCSA, and are bullish on its prospects for profit growth too. Long-term earnings are forecast to increase an average of more than 10% a year for the next three to five years.
- Market value: $212.3 billion
- Dividend yield: N/A
- Analysts' opinion: 23 Strong Buy, 12 Buy, 6 Hold, 0 Sell, 1 Strong Sell
Digital mobile payments and financial technology/e-commerce stocks in general are hot and only getting hotter. With its ample market value, reasonable moat and extensive reach, it makes sense that hedge funds would pour into PayPal (PYPL, $180.91).
The growth in mobile payments transactions, monetization of its Venmo property and incremental revenue growth in its Xoom business all help prop up the bull case for analysts and investors alike.
"PayPal is a better investment due to its focus on fast-growing ecommerce," says Piper Sandler, which rates PYPL at Overweight. "E-commerce is the bright spot of payments during the pandemic and the biggest beneficiary of strong e-commerce trends in our coverage is PayPal."
The market seems to agree. Shares in PayPal are up 67% year-to-date vs. a gain of less than 5% for the S&P 500.
14. Bank of America
- Market value: $221.8 billion
- Dividend yield: 2.8%
- Analysts' opinion: 8 Strong Buy, 7 Buy, 11 Hold, 0 Sell, 0 Strong Sell
Bank of America (BAC, $25.60), much beloved by Warren Buffett and a former member of the Dow, is popular with hedge funds for the same reason as JPMorgan Chase. As a sprawling money center bank, it offers a bet on both domestic and international growth trends.
It's also a bet on the increasing digitization of banking for retail and enterprise customers, notes Piper Sandler's Jeffery Harte:
"While the low interest rate environment creates meaningful revenue headwinds in consumer banking, we believe BAC will be a leading beneficiary of the pandemic-driven acceleration toward digital banking and reiterate our Overweight rating."
The analysts add that the recovery in consumer spending has progressed to the point of returning to year-over-year growth in August. Furthermore, credit quality is coming in better than expected and the overall picture has improved measurably over the last few months.
"Asset quality in the undeferred consumer portfolio remains solid across the board and the performance of borrowers coming off of deferral has been better than expected," Harte adds.
Deutsche Bank's Matt O'Connor upgraded BAC to Buy from Hold in early September as part of a general upgrade of select big bank stocks. "After being negative on bank stocks all year, we think performance vs. the broader market should improve (following more than a 40% lag so far this year)," O'Connor says.
- Market value: $213.4 billion
- Dividend yield: N/A
- Analysts' opinion: 16 Strong Buy, 8 Buy, 10 Hold, 2 Sell, 3 Strong Sell
It's a roller coaster of volatility, but its hot performance and growth prospects make Netflix (NFLX, $483.86) a darling of the hedge fund crowd.
And well it should. The streaming media and production blue chip holds the pole position in its industry and boasts a torrid growth forecast. Analysts expect Netflix to generate average annual earnings growth of 36% over the next three to five years, according to data from S&P Capital IQ. That's a remarkable rate for a company as big as Netflix (its market value stands at nearly $220 billion.)
Although some investors worry about new competing streaming services from the likes of Apple (AAPL) and Walt Disney (DIS), a plurality of analysts aren't too concerned. Between Strong Buy and Buy calls, 24 analysts are big-time bulls on the name. That compares with 10 Hold calls and a total of five Sells.
The more cautious view on NFLX stock usually comes down to some combination of valuation – it trades at 77 times fiscal 2020 earnings – competition, and costs. It's also worth noting that the big boost in viewership Netflix is enjoying because of the pandemic appears to have run its course.
"Interestingly, the viewing data shows streaming video share of TV screen time at just below 25% the past 3 months, maintaining the spike up in streaming usage since COVID-19 began in March, but also plateauing at that level following years of steady share gains," says Credit Suisse's Douglas Mitchelson, who rates the stock at Hold.
12. UnitedHealth Group
- Market value: $291.3 billion
- Dividend yield: 1.6%
- Analysts' opinion: 16 Strong Buy, 7 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Large institutional investors looking to make big bets in the health insurance sector can't avoid the gravitational pull of Dow component UnitedHealth Group (UNH, $306.52). With a market value of more than $290 billion and a 2021 sales forecast of $277.6 billion, this blue-chip stock is the largest publicly traded health insurer by a wide margin.
UnitedHealth's girth stems from a long history of mergers and acquisitions – including MetraHealth, HealthWise of America and AmeriChoice – and stock-price outperformance. In the past five years alone, UNH shares delivered an annual average total return (price appreciation plus dividends) of 22.5%, according to Morningstar. The broad U.S. stock market generated a total return of 13.5% over the same span.
The road ahead looks promising, too, as UNH ramps up its health insurance exchange operations. However, as always, there are concerns. Among them is the upcoming presidential election.
"Overwhelmingly, the key debates remain focused on election themes, politics and pricing," says UBS analyst Whit Mayo, who rates the stock at Neutral (Hold). "In the scenario Biden wins, the sector sentiment could likely swing more favorably."
Analysts' long-term growth forecast stands at more than 13% for the next three to five years.
- Market value: $309.2 billion
- Dividend yield: 0.1%
- Analysts' opinion: 20 Strong Buy, 10 Buy, 6 Hold, 1 Sell, 1 Strong Sell
Chipmaker Nvidia (NVDA, $500.58) is a no-brainer for hedge funds because it has exposure to a number of different growth trends.
For example, it has a huge presence in computer gaming, artificial intelligence, data servers, supercomputers, mobile chips and cryptocurrency mining. To further those ends, Nvidia recently inked a deal to buy chipmaker Arm Holdings from SoftBank (SFTBY) for $40 billion.
"The combination brings together Nvidia's leading AI computing platform with Arm's vast ecosystem to create the premier computing company for the age of artificial intelligence, accelerating innovation while expanding into large, high-growth markets," said Nvidia, touting its acquisition in a press release.
Analysts were bullish on the name even before the transformative deal, however. Argus Research's Jim Kelleher, which rates the stock at Buy, thinks the stock will get a further boost from here thanks to gaming.
"The COVID-19 pandemic has resulted in billions of people worldwide spending much more time in their homes," Kelleher says. "That in turn has driven significantly higher gaming activity. Nvidia primarily supports PC gaming, the preferred device for participants in eSports, which is one of the fastest-growing categories."
More immediately, Nvidia launched next-generation gaming cards in time for the upcoming shopping season, "setting up the gaming business for a strong quarter," Kelleher adds. "We thus look for a strong upgrade cycle this holiday season."
- Market value: $228.3 billion
- Dividend yield: N/A
- Analysts' opinion: 13 Strong Buy, 7 Buy, 7 Hold, 0 Sell, 1 Strong Sell
Adobe (ADBE, $476.00) is the undisputed leader in making software for designers and other creative types. Its software arsenal includes Photoshop, Premiere Pro for video editing and Dreamweaver for website design, among others.
Adobe's dominant position is partly why UBS rates the stock at Buy.
"Adobe shares have posted a healthy 45% gain year-to-date, but we think valuation remains attractive in the context of the broader market," UBS's Jennifer Swanson Lowe says. "The current pandemic should bolster demand for Adobe products, and the potential for margin expansion remains underappreciated in Street forecasts."
Lowe is hardly alone in her bullish view. Out of 28 analysts who cover ADBE tracked by S&P Capital IQ, 13 rate the stock at Strong Buy and seven say Buy. Another seven analysts call it a Hold and one slaps a Strong Sell on the name.
With projected average annual earnings growth of nearly 16% over the next three to five years, it's easy to see why ADBE is one of the hedge-fund set's favorite blue-chip stocks.
- Market value: $412.4 billion
- Dividend yield: N/A
- Analysts' opinion: 5 Strong Buy, 1 Buy, 17 Hold, 5 Sell, 4 Strong Sell
Tesla (TSLA, $441.76) has been an unbelievably remunerative and volatile stock. A recent 5-for-1 stock split didn't help on the volatility front, and a whopping 428% year-to-date surge has many analysts suggesting that investors should wait to get a better, more reasonable price.
But when it comes to having exposure to the massive implications of electric vehicles and allied technologies, TSLA is by far the most prominent and largest name. The market was surprised earlier in September when the stock was shut out of the most popular proxy for the U.S. stock market, but it has plenty of other things going for it, says Wedbush analyst Daniel Ives.
"While Tesla's stock continues to recover from its lack of inclusion in the S&P 500 index, which still remains somewhat of a mystery to the Street, all eyes are now laser focused on the company's highly anticipated Battery Day in Fremont on Sept. 22," says Ives, who rates the stock at Neutral (Hold). "Looking ahead, we believe Musk & Co. are slated to announce a number of new potential 'game changing' battery developments."
Ives adds that "China remains the linchpin for the Tesla bull case." That's because margins are incrementally higher on a Model 3 sold in China vs. the U.S. or Europe. "This could markedly increase the profitability profile for Tesla over the next few years as ultimately we see China representing 40%+ of global sales for the company potentially by early 2022."
- Market value: $342.2 billion
- Dividend yield: 0.5%
- Analysts' opinion: 20 Strong Buy, 9 Buy, 6 Hold, 1 Sell, 0 Strong Sell
It seems like everyone loves Mastercard (MA, $341.85). The global payments processor is a favorite of analysts and active mutual fund managers, too.
Even Warren Buffett is in on the name, although Berkshire Hathaway did trim its stake in Mastercard by 7% in the second quarter. Regardless, hedge funds on balance believe the bull case on this name, which William Blair's Robert Napoli and Christopher Kennedy sum up nicely.
"We believe Mastercard continues to enjoy substantial barriers to entry because of its massive scale and global reach, leading security and data management skills, information intelligence, brand recognition and trust," say William Blair's analysts, who rate MA at Outperform. "We believe Mastercard is a key beneficiary of the long-term secular shift toward electronic forms of payments, and that new technology such as mobile devices, mobile point-of-sale terminals and e-commerce, are helping accelerate the shift."
Mastercard has proven to be among the top blue-chip stocks to buy in recent history. It has outperformed the broader market by wide margins over the past one-, three-, five- and 10-year periods. That might just continue. Analysts project earnings growth to average more than 18% annually for the next three to five years.
- Market value: $228.0 billion
- Dividend yield: N/A
- Analysts' opinion: 25 Strong Buy, 11 Buy, 4 Hold, 0 Sell, 1 Strong Sell
Salesforce.com (CRM, $250.60), recently added to the Dow Jones Industrial Average, was doing software-as-a-service (SaaS) before it was cool. The company sells subscriptions to web-based applications to help companies increase and manage their sales.
Today, it seems like every company is trying to leverage cloud computing. But Salesforce.com has more going for it than being an early adopter. CFRA's John Freeman says the blue-chip stock a force to be reckoned with.
"Our Buy rating is based on what we see as a reasonable valuation for one of the most disruptive innovators in enterprise software," Freeman says. "In our view, the customer relationship management (CRM) segment continues to be ripe for share taking as legacy client-server apps still accounted for 39% of the highly fragmented CRM market."
But what really gets hedge funds' blood flowing are CRM's growth prospects. Analysts project Salesforce's earnings to expand at an average annual clip of almost 20% over the next three to five years.
As a group, the pros have 25 Strong Buy calls on the name and 11 Buy ratings. That comes against only four Holds and one Strong Sell.
- Market value: $1.03 trillion
- Dividend yield: N/A
- Analysts' opinion: 27 Strong Buy, 11 Buy, 5 Hold, 0 Sell, 0 Strong Sell
It should come as no surprise that hedge funds are big believers in Google parent Alphabet (GOOGL, $1,512.09). The stock has been a key driver of this year's rally in technology stocks.
Wedbush's Michael Pachter bases his Outperform rating in part on GOOGL's "unrivaled collection of high-profile and omnipresent core products and platforms." Indeed, that collection of assets is helping it get through these challenging times. Alphabet's advertising business declined with the impact of coronavirus, Pachter notes, but that was partially offset by growth in YouTube, Google Cloud and other revenues such as Google Play and subscriptions.
The pandemic performance bolsters the case that Alphabet is not a one-trick pony, as do its other major interests. For example, it's a major player in cloud-based services, and home to Nest Labs and self-driving car startup Waymo. Artificial intelligence, machine learning and virtual reality are major areas of investment.
Analysts expect GOOGL to deliver average annual earnings growth of almost 16% over the next three to five years, according to data from S&P Capital IQ. That's a torrid pace for a company with a market capitalization as gargantuan as Alphabet's.
- Market value: $436.5 billion
- Dividend yield: 0.6%
- Analysts' opinion: 20 Strong Buy, 9 Buy, 5 Hold, 1 Sell, 0 Strong Sell
It's not hard to see hedge funds put Visa (V, $205.13) among their most valued blue-chip stocks. As the world's largest payments network, the company is well positioned to benefit from the growth of cashless transactions and digital mobile payments.
Wall Street is wildly bullish on Visa, too. Of 35 analysts tracked by S&P Capital IQ, 29 call it a Strong Buy or a Buy. The pros expect Visa's profits to increase an average of almost 15% a year over the next three to five years.
Part of the bull case rests on Visa's resilience in tough times. Wedbush, with an Outperform rating, notes: "Fundamentally, looking at Visa's portfolio of growth drivers, incremental strength in eCommerce transaction volumes, solid performance in value-added services continue to somewhat offset weak cross-border travel trends."
And it's not just analysts and highflying hedge-fund managers who have taken a shine to Visa. It's also among the many blue-chip stocks held by Berkshire Hathaway. Although Buffett's holding company clipped its stake by 5% in Q2, it still owns almost 10 million shares worth roughly $2 billion.
- Market value: $750.7 billion
- Dividend yield: N/A
- Analysts' opinion: 32 Strong Buy, 7 Buy, 5 Hold, 1 Sell, 1 Strong Sell
Facebook (FB, $263.52) might be feeling increasing heat from critics and would-be regulators, but hedge funds don't much care – at least not yet. Such is the potential earnings power of the world's largest social network. Despite bad press and regulatory concerns, FB stock is up 28% for the year-to-date.
Facebook forms a digital-advertising duopoly with Google, thanks to its 2.4 billion monthly active users worldwide. But there's more to the company than its eponymous network. It also owns Instagram, the increasingly popular photo-sharing platform, and mobile instant-messaging apps WhatsApp and Messenger. And don't forget about Oculus, a virtual reality company.
Stifel analysts, who rate the stock at Buy, note that Facebook continues to grow users and advertising revenue on the core Facebook platform and its overall family of apps.
"We believe Facebook will continue to take share of the global online ad market, driven by audience growth, ad product innovation, enhanced targeting, and greater and greater return on investment measurement," Stifel's team writes.
Analysts forecast annual average earnings growth of more than 20% for the next three to five years. Not bad for a company worth more than three-quarters of a trillion dollars.
- Market value: $1.55 trillion
- Dividend yield: 1.1%
- Analysts' opinion: 23 Strong Buy, 8 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Microsoft (MSFT, $205.05) has long been one of the most popular blue-chip stocks with hedge funds. Credit the software giant's move to subscription-based services and cloud computing, which is just churning out profits.
Earnings per share from this component of the Dow are forecast to rise 12% in fiscal 2021 and another 14% the following year. Furthermore, Microsoft is a cash cow. It generated free cash flow of nearly $34.3 billion in the 12 months ended June 30. It has used that cash to pay a nicely growing dividend that has improved by 56% over the past half-decade, including a recently announced increase to 56 cents per share.
The Department of Defense's early-September announcement that it will still award MSFT its $10 billion Joint Enterprise Defense Infrastructure Cloud contract is a significant win. It also dealt "a major black eye for Amazon and (CEO Jeff) Bezos," says Wedbush's Daniel Ives, who rates the stock at Outperform.
Indeed, Wedbush argues that MSFT's cloud computing Azure business, as big as it is, is just getting started. "We believe enterprises are still in the earliest stages of their cloud migration (
Analysts forecast average earnings growth of more than 13% a year for the next three to five years, according to S&P Capital IQ. That's just jaw-dropping for a company that's already worth more than $1.5 trillion.
- Market value: $1.54 trillion
- Dividend yield: N/A
- Analysts' opinion: 34 Strong Buy, 11 Buy, 3 Hold, 0 Sell, 0 Strong Sell
Amazon.com (AMZN, $3,078.10), with its massive market value and dominance in e-commerce, routinely ranks among hedge funds' most popular holdings.
Even Warren Buffett got in on the act, picking up some Amazon shares last year.
Investors in Amazon have enjoyed outsized gains over the short, medium and long term. Indeed, AMZN has beaten the broader market by 35, 30 and 22 percentage points, respectively, over the trailing three-, five- and 10-year periods. And in 2020, Amazon's shares have jumped by more than 67% to help boost the Nasdaq Composite to an all-time high.
The pandemic has proven to be a boon for the e-commerce giant. "Revenue outperformance relative to expectations was driven by robust consumer demand," Wedbush's Michael Pachter said of AMZN's most recent quarter. "Online grocery sales were also a significant driver of revenue strength, growing by roughly 200% year-over-year," adds Pachter, who rates the stock at Outperform.
The Street is wildly bullish on AMZN, which certainly makes it easier for hedge funds to take the plunge. Of 48 analysts covering Amazon.com tracked by S&P Capital IQ, 34 rate it at Strong Buy, 11 say Buy and three call it a Hold. Their medium-term profit outlook is robust, too – they expect Amazon will grow its earnings by an average of 31.3% annually.
- Market value: $1.92 trillion
- Dividend yield: 0.7%
- Analysts' opinion: 18 Strong Buy, 7 Buy, 10 Hold, 1 Sell, 3 Strong Sell
With its massive market value – for the moment, it reigns as the world's largest publicly traded company – standing as a member of the Dow and cornerstone of the tech sector, it's only natural that hedge funds favor Apple (AAPL, $112.13) above all other blue-chip stocks.
Apple bulls point to the upcoming launch of the iPhone 12, which is expected to be a massive upgrade. Wedbush's Daniel Ives believes the latest iteration of the money-printing gadget will spark an upgrade "super cycle."
"While the soft macro and COVID backdrop are weighing on near-term consumer demand trends, Apple has a 'once in a decade' opportunity over the next 12 to 18 months as we estimate roughly 350 million of Cupertino's 950 million iPhones worldwide are in the window of an upgrade opportunity," writes Ives, who rates AAPL at Buy.
CFRA concurs with this view, adding, "We believe AAPL's bundle strategy (the company announced an "Apple One" service that combines music, TV and other services) will provide greater recurring revenue opportunities and could support upside potential to our Services estimates."
Analysts are overwhelmingly bullish on the name, with a total of 25 Strong Buy or Buy recommendations. That compares with 10 Hold ratings, one Sell and three Strong Sells.