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All Contents © 2018The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| February 28, 2018
Hedge funds don’t always live up to their high fees and hype, but it’s worth keeping tabs on what they’re doing nonetheless. After all, they comprise a large swath of institutional investor dollars. They’re the supposed “smart money,” and often act like it. It matters what they buy, sell and hold.
As the good folks at WalletHub note, the 50 largest U.S.-based hedge funds alone hold more than $6 trillion in assets. What they’re doing with those assets certainly is interesting, and perhaps even instructive.
Helpfully, WalletHub did a deep dive into which U.S. stocks are most popular with U.S. hedge funds. Combing through regulatory filings, they looked at the positions of more than 400 hedge funds, added up the positions for the same stock, then rank-ordered the stocks by their total holdings value.
Spoiler alert: Every one of these companies is massive by market value. Indeed, they would have to be to accommodate so much institutional interest. It also should come as no surprise that they are all household names.
Here’s a look at the 10 highest-rank hedge-fund stock picks. Not every one of the following stocks is necessarily a buy at current prices, but there are certainly no dogs in the group. In other words, it’s not hard to see why these stocks are the ones hedge funds love the most.
Data is as of Feb. 27, 2018. Companies are listed in order of popularity with hedge funds. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts’ ratings provided by Zacks Investment Research. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $224.6 billion
Dividend yield: 1.2%
Analysts’ opinion: 17 strong buy, 1 buy, 0 hold, 0 sell, 1 strong sell
If you’re a large institutional investor looking to make a big bet in the health insurance sector, you can’t really avoid UnitedHealth Group (UNH, $232.52). With nearly a quarter of a trillion dollars in market value and more than $200 billion in annual sales, UNH is the largest publicly traded health insurance company 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 have more than quadrupled on a price basis. The Standard & Poor’s 500-stock index, meanwhile, is up just 82% over the same time frame.
Analysts expect UnitedHealth’s earnings to increase an average of 16% a year for the next five years, according to data from Thomson Reuters. If they’re right, UNH should continue its winning ways.
Courtesy Reynermedia via Flickr
Market value: $280.8 billion
Dividend yield: 0.6%
Analysts’ opinion: 24 strong buy, 2 buy, 1 hold, 0 sell, 0 strong sell
It’s easy to see why Visa (V, $123.37) is so popular with hedge funds. As the world’s largest payments network, the company is well-positioned to benefit from the growth of cashless transactions and digital mobile payments. Indeed, analysts polled by Thomson Reuters expect Visa’s earnings to increase an average of 18% a year over the next half-decade.
But it’s not just the high-flying hedge-fund world that has taken a shine to Visa. It also happens to be one of Warren Buffett’s favorite stocks. Berkshire Hathaway (BRK.B), of which the famed value investor is chairman and CEO, owns nearly 11 million shares in Visa, worth roughly $1.3 billion. Analysts at Credit Suisse, who rate shares at “Outperform” (equivalent of “Buy”), like Visa’s solid revenue growth and the potential for more stock buybacks thanks to corporate tax cuts.
Shares in Visa have more than tripled over the past five years.
Market value: $334.8 billion
Analysts’ opinion: 8 strong buy, 2 buy, 8 hold, 0 sell, 0 strong sell
No wonder Bank of America (BAC, $32.33) is so popular with the hedge-fund crown. It has been the best-performing big bank stock of the past few years, and now rising interest rates and lower taxes could give it more room to run. Shares in BAC have more than doubled in three years. JPMorgan Chase (JPM) gained 92% over the same time frame, while Citigroup (C) added just 45%. Wells Fargo & Co. (WFC), hamstrung by scandal, gained just 8%.
Analysts are looking for Bank of America to deliver earnings-per-share growth of 35% this year, which explains hedge funds’ bullishness on the name. But even some canny value investors with longer investment horizons are big fans. Warren Buffett’s Berkshire Hathaway owns a 6.6% stake in Bank of America, making it one of the company’s largest holdings.
Market value: $404.9 billion
Dividend yield: 1.8%
Analysts’ opinion: 8 strong buy, 1 buy, 10 hold, 0 sell, 0 strong sell
JPMorgan Chase (JPM, $117.36) is the nation’s biggest bank by assets, so any institutional investor looking for exposure to the most important financial stocks is going to feel its gravitational pull. Happily for all involved, shares in JPM have been pulling their weight. The stock is up nearly 30% over the past 52 weeks, almost doubling the performance of the S&P 500.
Bulls are looking forward to more outperformance in the year ahead after the company raised its profitability goals in late February. Analysts at Credit Suisse rate shares in JPMorgan Chase at “Outperform,” thanks to its better-than-average earnings growth, market-share gains and “best-in-class” execution.
Market value: $293.1 billion
Dividend yield: 2.6%
Analysts’ opinion: 8 strong buy, 0 buy, 11 hold, 1 sell, 5 strong sell
Warren Buffett’s ardor for Wells Fargo (WFC, $59.21) might never cool, but it will be interesting to see if hedge funds continue to stick by the bank. Years of share-price underperformance stemming from a phony accounts scandal could be dismissed by long-term investors as a transitory setback.
We’ve been bullish on WFC on more than one occasion in the past. After all, it’s one of Warren Buffett’s holdings and has been an exemplary stock for retirement. Unfortunately, the Federal Reserve in January hit WFC with an order that restricts its growth until it makes changes to its corporate governance and risk controls. With the bank’s balance sheet in handcuffs, it’s possible that hedge funds will shift some of their big-bank bets to the unencumbered competition.
Don’t be surprised if WFC proves to be less popular with hedge funds going forward.
Market value: $781.5 billion
Dividend yield: N/A
Analysts’ opinion: 23 strong buy, 4 buy, 5 hold, 0 sell, 0 strong sell
You can’t fault hedge funds for loving Google-parent Alphabet (GOOGL, $1,117.51). Shares have been a key driver of the bull-market’s returns for years now, and the future remains bright.
It owns commanding market share in the fast-growing digital advertising industry. Indeed, the Google-Facebook (FB) duopoly attracted 84% of global spending on digital ads last year, excluding China. Farther afield, Alphabet is plowing investments into the next big things. It has artificial intelligence, machine learning and virtual reality in its sights, and it’s already a major player in cloud-based services.
Alphabet’s stock is up 31% in the past 52 weeks vs. a 16% gain for the S&P 500, and the great majority of analysts expect more outperformance ahead. Shares currently sell for 23 times forward earnings, which is more than reasonable given that profits are forecast to increase an average of 25% a year for the next five years.
Market value: $530.7 billion
Dividend yield: TK%
Analysts’ opinion: 23 strong buy, 4 buy, 2 hold, 0 sell, 0 strong sell
There’s a reason why Facebook (FB, $181.46) forms half of a global digital ad duopoly with Google. The world’s most popular social network has more than 2.1 billion active users, and advertisers are keen to reach all those eyeballs. But FB is far more than a one-trick pony. It also owns Instagram, the increasingly popular photo-sharing platform, and mobile instant-messaging apps WhatsApp and Messenger. And it owns Oculus, a virtual reality company.
For all the controversy the company has endured in the past year or so, FB stock has been an out-and-out winner. Shares are up 34% over the last 52 weeks, more than doubling the performance of the broader market. And for all the handwringing over changes to Facebook’s News Feed – and ad revenue prospects – analysts still expect both revenue and earnings per share to rise about 35% this year.
Market value: $916.0 billion
Dividend yield: 1.4%
Analysts’ opinion: 13 strong buy, 1 buy, 13 hold, 0 sell, 1 strong sell
It’s a no-brainer that one of the best stocks of all time would be a hedge-fund darling. Berkshire Hathaway is no hedge fund – far from it – but Apple (AAPL, $178.39) also happens to have caught the affection of Warren Buffett. Heck, it’s fair to say the iPhone maker is now his single favorite stock. Berkshire Hathaway purchased more Apple shares than any other stock over the past year, and upped its stake by 23% in the fourth quarter alone. With a value of about $30 billion, Apple is Berkshire’s single largest investment.
The bull case for Buffett and hedge funds alike is that Apple consumers, a famously loyal bunch, don’t just buy a single gadget; they buy into an entire ecosystem of hardware, software and services. That stickiness has served AAPL well. Analysts expect earnings to rise another 25% this year alone.
Market value: $739.0 billion
Analysts’ opinion: 29 strong buy, 5 buy, 3 hold, 0 sell, 1 strong sell
“Long Duration Dominance.” That was the headline on a recent research report by Stifel, and it sums up the bull case on Amazon (AMZN, $1,511.98) quite nicely. Analyst Scott Devitt calls the e-commerce giant the Tom Brady of the internet, and it’s well-deserved praise, especially after the kind of year-end Amazon had. “The strong holiday season coupled with continued strength in (cloud-based services), international markets, and emerging businesses such as advertising and devices paved the way for another impressive quarter,” says Dewitt, who rates shares at “Buy.”
How could hedge funds not love this name? Amazon has a market value of about three-quarters of a trillion dollars and earnings are projected to grow an average of 28% a year for the next half-decade. Big companies aren’t supposed to be able to do that.
Hedge funds are expected to deliver outperformance. They simply cannot ignore Amazon.
Market value: $733.1 billion
Dividend yield: 1.7%
Analysts’ opinion: 20 strong buy, 1 buy, 4 hold, 1 sell, 1 strong sell
There’s something wonderful about boring old Microsoft (MSFT, $94.20) being more popular with hedge funds than Amazon, Apple, Alphabet or Facebook.
The software giant’s transition to subscription-based services and cloud computing has lit a fire under the stock. MSFT is up nearly 50% over the past year, beating Facebook and Alphabet’s gains in the 30%-35% range. (Amazon is up almost 80% over the same span.)
Analysts expect more such outperformance to come. William Blair Equity Research has an “Outperform” rating on the stock because Microsoft is “killing it in the cloud.” Total commercial cloud revenue, which includes Office 365 and Azure, grew 56% year-over-year in the most recent quarter.
It looks like Microsoft’s amazing second act has made it No. 1 in hedge funds’ hearts.
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