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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 16, 2019
Hedge funds currently command some $3 trillion in assets under management. They're where millionaires and even billionaires put their cash to work. That alone makes them worth keeping an eye on – and one thing that's fairly consistent is their love for blue-chip stocks.
Sure, hedge funds aren't what they used to be. Wall Street's former masters of the universe have lagged the performance of the S&P 500 throughout the bull market. And as the ultimate example of active management, they charge exorbitant fees. But hedge funds' heavy investments in research helps managers lay claim to being Wall Street's "smart money."
The folks at WalletHub keep regular tabs on stocks that hedge fund managers are buying, selling and holding every quarter. Combing through regulatory filings, WalletHub looks at the positions of more than 400 hedge funds, tallies their positions in individual stocks, then ranks those stocks by their total holdings value.
These are primarily massive blue-chip stocks, ranging from the hundreds of billions of dollars to more than $1 trillion. Indeed, their very size helps attract more institutional interest. Unsurprisingly, then, most of these stock picks are big, stable names known to most Americans. A substantial number happen to belong to Warren Buffett's Berkshire Hathaway portfolio.
Here are hedge funds' 25 favorite blue-chip stocks to buy now. All these stocks likely appeal to the smart money because of their size and strong track records. But we'll delve into a few specifics that make each company special.
Data is as of Dec. 13, unless otherwise noted. Companies are listed in reverse order of popularity with hedge funds, according to WalletHub. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts’ ratings provided S&P Global Market Intelligence.
Market value: $125.1 billion
Dividend yield: 4.1%
Analysts' opinion: 17 Strong Buy, 5 Buy, 13 Hold, 0 Sell, 0 Strong Sell
Semiconductor manufacturer Broadcom (AVGO, $315.42), a wireless-tech specialist, offers investors a history of hefty dividend growth as well as exposure to the next big thing in telecommunications. Analysts say AVGO is a great way to play the coming tsunami of 5G technology.
"In our view, 5G could prove to be one of the more compelling and investible themes in semis, driven by the exponential growth in components required to upgrade approximately 1.4 billion 4G smartphones and several hundred million IoT (Internet of Things) devices," writes BofA Global Research analyst Vivek Arya, who has a Buy rating on the stock.
Wall Street is broadly bullish on the name, and institutional investors have to like its growth prospects. Broadcom is forecast to deliver long-term earnings growth of more than 12% a year over the next three to five years, according to S&P Global Market Intelligence.
Broadcom is a dividend-growth play, to boot. Since 2014, AVGO's payout has exploded by roughly 830%, from 35 cents per share quarterly to its current $3.25.
Market value: $152.2 billion
Dividend yield: 1.9%
Analysts' opinion: 12 Strong Buy, 6 Buy, 8 Hold, 0 Sell, 0 Strong Sell
Any big fund looking to diversify its holdings with health-care stocks probably can't afford to ignore Medtronic (MDT, $113.52).
After all, Medtronic is one of the world's largest makers of medical devices, holding more than 4,600 patents on products ranging from insulin pumps for diabetics to stents used by cardiac surgeons. Look around a hospital or doctor's office – in the U.S. or in about 160 other countries – and there's a good chance you'll see its products.
The company is focused on the health of its shareholders as well as its patients: Medtronic has been steadily increasing its dividend every year for more than four decades, making it a member of the S&P Dividend Aristocrats.
Argus analysts, who rate shares at Buy, praise MDT's in "solid performance in emerging markets" and strong sales of its diabetes products overseas.
The analyst community as a whole expects Medtronic's earnings to improve at an average annual rate of 8.9% for the next five years, according to data from Thomson Reuters.
Market value: $166.8 billion
Dividend yield: 2.7%
Analysts' opinion: 13 Strong Buy, 9 Buy, 4 Hold, 1 Sell, 0 Strong Sell
A money-center bank with a massive market value, share liquidity and central place in the financial system will almost always be popular among professional asset allocators.
Little wonder, then, that Citigroup (C, $76.39) – one of the nation's largest banks by assets – is a must-have holding for a wide swath of hedge funds.
Analysts as a group are bullish on Citigroup's fortunes, and investors who have stuck by the stock have been well rewarded in 2019. Shares are up about 46% for the year-to-date, vs. a gain of 26% for the S&P 500. The company's dividend continues to recover from its financial-crisis plunge, jumping from a penny per share in 2014 to 51 cents currently.
By average recommendation, analysts fall solidly in the bull camp on Citigroup. "Citigroup's streamlining efforts, along with strategic investments in core business, bode well for the long term," writes Zacks Equity Research.
Market value: $551.0 billion
Dividend yield: N/A
Analysts' opinion: 1 Strong Buy, 2 Buy, 3 Hold, 0 Sell, 0 Strong Sell
If you can't beat 'em, join 'em.
Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B, $225.37), is the world's greatest long-term investor. His 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%. Indeed, Berkshire Hathaway also is among the top 50 stocks of all time.
Although insurance is the cornerstone of Berkshire's business, scores of wholly owned subsidiaries and stakes in everything from Apple (AAPL) to Bank of America (BAC) to Delta Air Lines (DAL) make BRK.B shares a diversified bet on the broader economy.
Just don't ask the analysts what they think. Wall Street's pros are notoriously tight-lipped about Warren Buffett's company – only six tracked by S&P Capital IQ have any sort of rating on the stock.
Market value: $372.1 billion
Analysts' opinion: 7 Strong Buy, 4 Buy, 9 Hold, 0 Sell, 0 Strong Sell
Like Medtronic mentioned above, Johnson & Johnson (JNJ, $141.38) is a must-have holding in any large-cap health-care fund.
J&J, a 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.
The health-care titan has been making all sorts of headlines lately, though for all the wrong reasons. In late October, J&J was forced to recall baby powder on fears that it was contaminated with asbestos. And in November, the company said it would contribute $4 billion to families of opioid victims as part of a settlement with state attorneys general. However, that last bit of news is something of a blessing in disguise, as many analysts were targeting higher price tags. Wells Fargo, for instance, believed Johnson & Johnson would have to pay out $5 billion to $10 billion to get out from underneath its opioid issues.
Hedge funds, and analysts, are hardly budging on the name. These aren't the first headwinds for J&J, which has been around since 1886. The company is well-diversified, and hedge funds seeking exposure to big companies in the health-care sector can't really avoid it. JNJ is also a dividend payer extraordinaire – it's one of a handful of Dividend Aristocrats with 55 or more years of payout growth.
Market value: $128.5 billion
Dividend yield: 0.2%
Analysts' opinion: 11 Strong Buy, 3 Buy, 3 Hold, 1 Sell, 0 Strong Sell
Thermo Fisher Scientific (TMO, $320.50), the world's largest maker of scientific instruments, cracked the top 25 most popular hedge fund stocks during the first quarter of 2019. It was helped by big buys on the part of Marshall Wace, Viking Global Investors and Citadel Advisors.
As a group, hedge funds hold 2.2% of TMO's shares outstanding. Part of the allure for hedge fund managers could be simple price momentum; TMO stock has churned out 70% gains over the past two years while the broader market has gained just 17% across several hills and valleys.
The fundamentals look compelling too, given TMO's vast portfolio of laboratory equipment, applications and techniques it provides to the pharmaceutical and biopharmaceutical industries. To get a sense of its scope, Janney analysts, who rate shares at Buy, like to call TMO the 'Amazon of Life Science Tools.'
Stifel analysts rate TMO a Buy, too, saying it offers the "best combination of solid growth and reasonable valuation." The analysts also praise TMO's "top-notch execution" on both its attempts to improve internally, as well as its mergers & acquisitions (M&A) activity.
Market value: $102.1 billion
Dividend yield: 1.4%
Analysts' opinion: 10 Strong Buy, 4 Buy, 15 Hold, 1 Sell, 0 Strong Sell
There's a lot to love about American Express (AXP, $124.72). Its management is strong, it's a dominant brand in the industry and it generates copious amounts of free cash flow – the money left over after essential capital expenditures are made – which can be used to finance dividends and stock buybacks.
The Street is largely bullish on this blue-chip stock. "American Express is a leader in the electronic payments market globally, has a well-regarded brand, provides industry leading customer service, generates high returns on capital … and has industry leading technology," write analysts at William Blair, who rate shares at Outperform (equivalent of Buy).
American Express's current dividend yield isn't eye-catching, but it is safe and growing. The company spends less than 20% of its profits financing the payout, and the dividend has plumped up by 48% over the past five years. AXP stock is only slightly more volatile than the broader market, too. Those are attributes that will help any investor – retail or institutional – sleep better at night.
Hey, if it's good enough for Warren Buffett, it should be good enough for hedge funds, too. Berkshire Hathaway's chief took his first stake in AmEx in the 1960s, and it's still paying off a half-century later. Today, Berkshire owns 18.5% of the company's shares outstanding; the stake is worth roughly $19 billion.
Market value: $223.5 billion
Dividend yield: 2.5%
Analysts' opinion: 13 Strong Buy, 8 Buy, 13 Hold, 1 Sell, 0 Strong Sell
Home Depot (HD, $214.08) is an irresistible way for institutional investors such as hedge funds to bet on both the housing market and the health of U.S. consumers.
Not only is Home Depot the nation's largest home improvement retailer, but it's also one of the elite 30 members of the Dow. Blue-chip stocks don't get bluer than that.
Morgan Stanley sees short-term weakness in the stock, hurt by margin pressure and soft sales growth – analyst Simeon Gutman was literally taken by surprise by Home Depot's guidance, writing that he "did not anticipate the magnitude of the miss relative to expectations." Nonetheless, he remains bullish for 2020, with an Outperform rating on HD shares.
RBC Capital, with its own Outperform call, believes 2020 will be HD's year of peak investment and says the macroeconomic environment bodes well for the housing sector, which in turn should benefit Home Depot.
Analysts surveyed by S&P Global Market Intelligence expect HD to deliver average earnings growth of 8.7% annually over the next three to five years.
Market value: $192.3 billion
Dividend yield: 2.4%
Analysts' opinion: 8 Strong Buy, 1 Buy, 13 Hold, 0 Sell, 1 Strong Sell
Few blue-chip stocks have faced as many headwinds in 2019 than Boeing (BA, $341.67). Airlines around the world have grounded its popular 737 Max jets amid safety concerns. And The Wall Street Journal recently reported that the company is "considering either suspending or cutting back production" of the aircraft given a lack of clarity into when the 737 Max will return to the skies.
But hedge funds haven't much lost their ardor for the industrial stock.
Boeing's massive market value and blue-chip status – it's yet another member of the Dow – make it a natural home for hedge funds and other institutional investors. And the current woes won't last forever.
"A return to flight for the MAX and clarification on the associated charges would probably remove an overhang, and in our view be positive for the stock," Vertical Research Partners analyst Robert Stallard writes in a note to clients. But even though he rates shares a Buy, he admits BA is a "tough stock to call."
A long record of consistent share-price outperformance also helps explain why Boeing remains popular with the hedge-fund crowd despite its shorter-term woes. BA stock has beaten the broader market by wide margins over the last three-, five-, 10- and 15-year periods. That makes it one of the best S&P 500 stocks of the past 25 years.
Market value: $153.4 billion
Analysts' opinion: 11 Strong Buy, 7 Buy, 13 Hold, 0 Sell, 0 Strong Sell
Adobe (ADBE, $317.94) 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 BMO Capital Markets rates its stock at Outperform, adding that Adobe stock is "reasonably, if not attractively, valued." BMO analysts expect further margin expansion over the next few years.
Hedge funds clearly agree, no doubt lured by earnings growth that's forecast to rise at an average rate of 16% annually for the next three to five years.
That said, note the relative timidity of the analyst community. The pros' average target price of $322.43 gives ADBE implied upside of just about 1% over the next 12 months – which explains why 13 pros surveyed by S&P Global Market Intelligence rate shares at "Hold."
Market value: $142.9 billion
Analysts' opinion: 29 Strong Buy, 12 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Salesforce.com (CRM, $161.13) 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.
Now every company is trying to leverage cloud computing.
Salesforce.com has more going for it than being an early adopter. Wedbush Research, which includes the stock on its Best Ideas List, praises the company's recent acquisitions. "Salesforce's $15.7 billion acquisition of Tableau (in June) is ground-breaking in many respects," Wedbush analysts write, adding that deals for MuleSoft and Click Software are also making healthy contributions. They also call the move "a shot across Microsoft's bow, extending the CRM rivalry into the heart of the analytics 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 25% over the next three to five years.
As a group, the pros have a Strong Buy rating on CRM. Their average target price of $189.38 gives shares implied upside of 17% in the next year or so.
Market value: $233.2 billion
Dividend yield: 2.9%
Analysts' opinion: 9 Strong Buy, 4 Buy, 11 Hold, 0 Sell, 0 Strong Sell
Dow stock alert! As a massive company and cornerstone of the consumer staples sector of the market, Coca-Cola (KO, $54.42) is a natural fit for a wide swath of institutional investors. Just ask Warren Buffett. He first bought shares in the fizzy drink maker in 1987; today, KO comprises fully 9.3% of Berkshire Hathaway's equity portfolio.
Morgan Stanley Research, which rates shares at Overweight (equivalent of Buy), says KO isn't done growing by a long shot. "Coke offers a clearly superior long-term growth outlook vs. its peers, with stronger pricing power and favorable strategy tweaks, augmented short term by rebounding emerging market trends," the firm writes.
Coca-Cola is an income investor's dream, too. KO has paid a quarterly dividend since 1920, and that dividend has increased annually for 57 years.
The dependable, rising dividend and comparatively low volatility make Coke a way to add defensive ballast to a portfolio. Meanwhile, there's plenty of room for institutional investors to build large positions thanks to the stock's gargantuan market value and attendant liquidity.
Market value: $130.8 billion
Analysts' opinion: 19 Strong Buy, 8 Buy, 10 Hold, 2 Sell, 4 Strong Sell
Netflix (NFLX, $298.50) is popular with hedge funds? You don't say!
The streaming media and production company holds the pole position in its industry and boasts a torrid growth forecast. Analysts expect Netflix to generate average annual earnings growth of nearly 40% over the next three to five years, according to data from S&P Global Market Intelligence. That's a remarkable rate for a company with a market value of $130 billion.
Although some investors worry about new competing streaming services from the likes of Apple and Walt Disney (DIS), a plurality of analysts aren't too concerned.
Piper Jaffray, which rates NFLX shares at Overweight, expects Netflix to continue to capture a "significant portion" of spending on content "despite an onslaught of new streaming services."
That said, a considerable portion of the analyst community is either on the sidelines or advising investors to sell the stock. They believe future U.S. expansion will be difficult to come by, and shares are essentially pricing in perfection.
Market value: $198.3 billion
Analysts' opinion: 22 Strong Buy, 8 Buy, 7 Hold, 0 Sell, 0 Strong Sell
Cable, broadband and media giant Comcast (CMCSA, $43.58) has a full load of Strong Buy ratings from Wall Street analysts, so it should come as no surprise that it's popular with hedge funds, as well.
Comcast isn't letting the rest of the industry out-scale it without a fight. CMCSA, which already owns NBC Universal, closed its $39 billion takeover of European pay-TV giant Sky in October.
"We see Comcast as strategically well placed given its diversified portfolio (content, broadband, pay TV, theme parks and movies)," writes HSBC's Sunil Rajgopal, which calls the stock a Buy. That's no small thing, considering that's his only Buy among telecom and cable stocks.
Analysts as a group forecast the company to deliver average annual earnings growth of almost 11% over the next three to five years.
Market value: $227.5 billion
Dividend yield: 3.8%
Analysts' opinion: 2 Strong Buy, 3 Buy, 19 Hold, 2 Sell, 3 Strong Sell
Wells Fargo (WFC, $53.79) has earned itself plenty of bad press over the past few years. However, the nation's third-largest bank by assets remains popular with hedge funds – and yes, a resolute Warren Buffett.
We've been bullish on WFC on more than one occasion in the past. After all, it's one of Warren Buffett's top holdings and has been an exemplary stock for retirement. That said, shares have underperformed the broader market over the past one-, three- and five-year periods, hampered by the bank's phony accounts scandal and other issues.
Sandler O'Neill & Partners rates WFC a Buy, as new CEO Charlie Scharf "rapidly makes his impression on the company." Scharf took the top job at the end of September – the company's third CEO (fourth, if you count Interim CEO C. Allen Parker) since 2016.
The mega-sized market value, liquidity – and the fact that Buffett refuses to back down from Berkshire's 8.9% stake in the firm – make it tough for hedge funds to forgo WFC.
Market value: $298.7 billion
Dividend yield: 0.5%
Analysts' opinion: 23 Strong Buy, 10 Buy, 3 Hold, 1 Sell, 0 Strong Sell
It seems like everyone loves Mastercard (MA, $296.09). The global payments processor is a favorite of analysts and active mutual fund managers, too.
Then there's the imprimatur of the world's greatest long-term investor. Warren Buffett's Berkshire Hathaway owns 4.9 million shares in Mastercard worth about $1.5 billion.
Compass Point analysts, who rate the stock a Buy, cite tailwinds such as a healthy U.S. consumer, continued integration of software and payments, the rise of mobile commerce, and growth in cross-border payments.
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 17% annually for the next three to five years.
Market value: $270.5 billion
Dividend yield: 1.5%
Analysts' opinion: 15 Strong Buy, 8 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Large institutional investors looking to make big bets in the health insurance sector can't really avoid UnitedHealth Group (UNH, $285.48). With a market value of $270 billion and a 2020 sales forecast of $262 billion, UNH is the largest publicly traded health insurance company by a wide margin.
Wells Fargo analyst Peter Costa (Overweight) expects UNH to continue to deliver strong earnings growth thanks to Optum, the company's health services business. The Medicare Advantage market also represents a strong growth opportunity.
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 a total return (price appreciation plus dividends) of almost 25%, according to Morningstar. The broad U.S. stock market generated a total return of less than 12% over the same span.
The road ahead looks promising, too. Analysts expect UnitedHealth's earnings to increase an average of more than 13% annually for the next half-decade, according to data from S&P Global Market Intelligence.
Market value: $309.8 billion
Dividend yield: 2.1%
Analysts' opinion: 9 Strong Buy, 6 Buy, 13 Hold, 1 Sell, 0 Strong Sell
Bank of America (BAC, $34.44) is another blue-chip stock beloved by both hedge funds and Warren Buffett alike. The nation's second-largest bank by assets is a top Berkshire position. The holding company owns a stake worth more than $32 billion, second in value only to its investment in Apple.
Keefe, Bruyette & Woods analysts fear what a prolonged trade war could mean for BAC.
"An escalation of the trade war occurred shortly after the Sept. rate cut and we see no end in sight for the trade war and we expect that to weigh on growth and long-term rates for the intermediate term," says KBW, which rates shares at Market Perform (equivalent of Hold).
As a massive money-center bank, BofA is almost unavoidable for hedge funds looking to make big bets on the financial sector. A good chunk of analysts call it a Hold, however, as its target price of $34.17 offers no upside – indeed, a small amount of downside – over the next year.
Market value: $429.1 billion
Dividend yield: 2.6%
Analysts' opinion: 7 Strong Buy, 4 Buy, 14 Hold, 2 Sell, 1 Strong Sell
What goes for BofA goes double for JPMorgan Chase (JPM, $136.81) when it comes to hedge funds looking to make super-sized bets on the financial sector. Not only is JPM America's largest bank by assets, but it's a member of the Dow Jones Industrial Average too.
With its status among blue-chip stocks, huge market value and highly respected (if not occasionally controversial) CEO Jamie Dimon, JPMorgan is naturally a magnet for hedge funds.
It helps that Warren Buffett is a fan, too. Berkshire Hathaway initiated a position in JPM in the third quarter of 2018 and has been boosting it ever since. The holding company now owns 59.5 million shares worth about $8.1 billion.
Some analysts say the valuation on JPMorgan shares is a bit stretched, however. "JPM is currently trading at 12.6 times our 2020 estimate and this is near the high for the company's recent history," says Keefe, Bruyette & Woods. "We would look to add shares when valuations are more reasonable."
Analysts forecast average annual earnings growth of almost 10% over the next three to five years.
Market value: $928.9 billion
Analysts' opinion: 28 Strong Buy, 11 Buy, 6 Hold, 0 Sell, 0 Strong Sell
It should come as no surprise that hedge funds are big believers in Google parent Alphabet (GOOGL, $1,346.87). The stock has been a key driver of the bull market's returns throughout its 10-year run, and Alphabet's growth prospects remain bright.
"We are upgrading shares of Alphabet to Buy from Hold on valuation and durable earnings growth of the business," Stifel Equity Research analysts wrote in a Dec. 5 report. "Additionally, we are encouraged by Google's continued share gains of advertising dollars and see a continued runway for healthy revenue growth."
Longer-term, it helps that Alphabet is no one-trick pony. It's also 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 15% over the next three to five years, according to data from S&P Global Market Intelligence. That's a red-hot pace for a company with a market capitalization as gargantuan as Alphabet's.
Market value: $411.4 billion
Dividend yield: 0.6%
Analysts' opinion: 22 Strong Buy, 10 Buy, 3 Hold, 1 Sell, 0 Strong Sell
It's easy to see why Visa (V, $185.14) is 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.
Wall Street is wildly bullish on Visa, too. Of the 36 analysts tracked by S&P Global Market Intelligence, 32 call it a Strong Buy or a Buy. The pros expect Visa's profits to increase an average of more than 16% a year over the next three to five years.
Wedbush, which rates V at Outperform, says Visa has shown no indications of a global economic slowdown. Analysts also cite the company's earnings consistency, "impressive" return on invested capital (ROIC) strong free cash flow generation and attractive capital allocation programs.
Compass Point's Michael Del Grosso chimed in at the beginning of December, starting V shares at Buy, citing "unmatched" scale and its leadership position.
But 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. Buffett's holding company owns 10.6 million shares in Visa, worth roughly $2 billion
Market value: $553.6 billion
Analysts' opinion: 33 Strong Buy, 10 Buy, 6 Hold, 1 Sell, 1 Strong Sell
Facebook (FB, $194.11) might be feeling increasing heat from critics and would-be regulators, but hedge funds don't much care – yet. Such is the potential earnings power of the world's largest social network. Despite bad press and regulatory concerns, FB stock is up 48% 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 upgraded FB stock to Buy from Hold on Dec. 5, noting that they're "incrementally positive on Facebook's ability to drive sustained above-market ad revenue growth, maintain healthy levels of user growth / engagement, and better align expenses with top-line growth."
Analysts forecast annual average earnings growth of more than 20% for the next three to five years. Not bad for a half-trillion-dollar company.
Market value: $873.1 billion
Analysts' opinion: 35 Strong Buy, 11 Buy, 2 Hold, 0 Sell, 0 Strong Sell
From Wall Street analysts to mutual fund managers, it seems everyone loves Amazon.com (AMZN, $1,760.94). No surprise, then, that hedge funds do too.
The e-commerce giant, which did not prioritize profits for years, is now forecast to generate average annual earnings growth of more than 30% for the next three to five years. That's an astonishing growth rate for a company with a market cap of more than $870 billion.
The reason why Amazon has become so profitable, however, has little to do with its core retailing business. The company's cloud business, Amazon Web Services (AWS), is a high-margin machine. The company also makes money via Echo smart speakers, Amazon Prime memberships and even ads.
Warren Buffett, a longtime admirer of Amazon founder and CEO Jeff Bezos, recently hopped on board. Berkshire Hathaway jumped into the stock during the first quarter of 2019, then upped his stake in Q2. Berkshire now owns 537,300 shares worth around $946 million.
Citi Research says it be difficult for competition to make inroads against AMZN.
"We believe Amazon is intentionally selling goods to Consumers at a loss," Citi writes. "But, it is leveraging dual-purpose infrastructure (servers, fulfillment centers, web traffic) to profitably sell services to Enterprises."
Market value: $1.22 trillion
Dividend yield: 1.1%
Analysts' opinion: 20 Strong Buy, 5 Buy, 14 Hold, 1 Sell, 5 Strong Sell
A gigantic Dow dividend-paying stock owned by Warren Buffett? Check. So naturally it follows that Apple (AAPL, $275.15) is a hedge fund darling, too.
Shares in Apple had their ups and downs in the first half of the year, but since late summer they've been on unbroken tear. AAPL is up about 74% for the year-to-date. That bests the broader market by 48 percentage points.
The bull case for Apple stock is that the company's customers – a famously loyal bunch – don't just buy a single gadget. They buy into an entire ecosystem of hardware, software and services. That includes things such as apps from the App Store, music on iTunes and financial services such as Apple Pay.
Apple accounts for 24% of the total value of Berkshire Hathaway's equity portfolio, which makes it Warren Buffett's single-biggest bet in the stock market. It's a good growth engine to have. Analysts see average annual earnings growth of almost 12% a year over the next five years. That's remarkable for a company worth a little more than $1.2 trillion.
Market value: $1.18 trillion
Dividend yield: 1.3%
Analysts' opinion: 23 Strong Buy, 10 Buy, 3 Hold, 0 Sell, 0 Strong Sell
Microsoft (MSFT, $154.53) continues its reign as the blue-chip stock most popular 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 are forecast to rise 13% this year and another 12% the following year. Microsoft generated free cash flow of nearly $34 billion in the 12 months ended Sept. 30. It has used that cash to pay a nicely growing dividend that has improved by 65% over the past half-decade.
Wedbush analysts believe the company'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 (<10% penetrated)," Wedbush writes. Investors of all stripes applaud the way MSFT refocused the company around Azure and Office 365. Wedbush says those products are "large, multi-year secular growth engines."
Analysts forecast average earnings growth of more than 12% a year for the next three to five years, according to S&P Global Market Intelligence data. As with AAPL, that's almost jaw-dropping for a company worth more than $1 trillion.