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All Contents © 2020The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| April 26, 2019
Hedge funds are where millionaires and even billionaires funnel their money to find ways to outperform the market. They don’t always live up to the hype, and they’re constantly derided as too expensive. But they command more than $3 trillion in assets, possess a great deal of institutional brainpower and sometimes do produce the returns they promise. So it’s smart to keep watch over the so-called “smart money” when evaluating stocks to buy.
And right now, they love tech stocks.
WalletHub keeps tabs on hedge funds’ quarterly buying and selling actions. They comb through regulatory positions of more than 400 hedge funds, tally their positions in individual stocks, then rank the stocks by their total holdings value.
More than 20% of hedge funds’ top 25 positions are in tech stocks at the moment – and that figure actually widens if you consider all of the tech-esque stocks that fall into other sectors. Amazon.com (AMZN), for instance, shares space with mall retailers and restaurants in the consumer discretionary sector. Other stocks such as Facebook (FB), Netflix (NFLX) and Google parent Alphabet (GOOGL) are part of the new communication services sector.
Here are the six pure-play tech stocks that the hedge funds love most. Each of these companies features a can’t-miss combination of bulletproof balance sheets and strong growth potential.
Data is as of April 25 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 by FactSet via WSJ.com.
Market value: $126.4 billion
Dividend yield: N/A
Analysts’ opinion: 39 strong buy, 4 buy, 3 hold, 0 sell, 0 strong sell
Salesforce.com (CRM, $163.09) has an apropos ticker given that it’s the biggest name in customer relationship management (CRM). The company sells subscriptions to web-based applications to help companies analyze consumer data, manage sales, improve customer loyalty … and ultimately, be more profitable.
And Salesforce.com was delivering software-as-a-service long before cloud-based services exploded in popularity.
Jefferies doesn’t just view CRM as best in class among other tech stocks, but across the entire market. Analyst John DiFucci recently reiterated his “Buy” call, saying it’s still a top large-cap pick following the company’s $300 million buyout of California public benefit corporation Salesforce.org.
Even during a bout of weakness earlier this year, Goldman Sachs analyst Heather Bellini told CNBC, “We continue to see CRM as one of the best positioned companies in software.” Now, Salesforce.com is retesting all-time highs.
Wall Street is wildly bullish on the stock, too. Forty-three of 46 covering analysts rate it a “Buy” or “Strong Buy,” and the analysts community expects CRM to grow earnings at more than 28% annually on average over the next half-decade.
Market value: $277.66 billion
Analysts’ opinion: 17 strong buy, 2 buy, 13 hold, 0 sell, 0 strong sell
Adobe (ADBE, $277.66) is the undisputed leader of software for designers and other creative types. Its offerings include Photoshop, Premiere Pro for video editing, Dreamweaver for website design and photo service Lightroom.
But what really has set the stock afire in recent years is switching from selling its software on a per-copy basis to a subscription model that creates reliable, recurring revenues.
At the end of March, Rosenblatt Securities analyst Marshall Senk said about Adobe, “We leave (the Adobe Summit conference) with more confidence in the Digital Experience business than before the event and would increase positions on any misperception of weakness from the 1Q19 results.” He reiterated his “Buy” rating and set a $280 price target.
Hedge funds clearly agree, no doubt lured by earnings growth that’s forecast to rise at an average rate of nearly 23% per year through 2024.
Market value: $252.0 billion
Dividend yield: 0.5%
Analysts’ opinion: 33 strong buy, 5 buy, 4 hold, 0 sell, 0 strong sell
While Mastercard (MA, $245.61) is commonly viewed as a financial stock, it actually ranks among the largest tech stocks on Wall Street. That’s because Mastercard is not responsible for, say, lending money – instead, it’s merely a payments processor that provides a technological service for banks and other financial businesses.
Mastercard is a favorite of analysts, a favorite of active mutual fund managers and has the blessing of the world’s greatest value investor. Warren Buffett’s Berkshire Hathaway (BRK.B) owns 4.9 million shares in Mastercard worth about $1.2 billion.
Mastercard has racked up 10 “Buy” calls in the past month alone, including Cantor Fitzgerald analyst Joseph Foresi. Foresi maintained his “Overweight” rating (equivalent of “Buy”) on MA recently based on “the company’s ability to grow faster than its peers and its potential to expand margins.”
Mastercard has proven to be a wise investment. It has outperformed the broader market by wide margins over almost every significant time period, and that may just continue. Analysts project earnings growth to average roughly 21% annually for the next five years.
Market value: $352.3 billion
Dividend yield: 0.6%
Analysts’ opinion: 31 strong buy, 6 buy, 3 hold, 0 sell, 0 strong sell
Visa (V, $161.02) is another tech stock in financial clothing, and there’s no mystery as to why it’s popular with hedge funds. As the world’s largest payments network, Visa is well-positioned to benefit from the growth of cashless transactions and digital mobile payments. Analysts polled by Refinitiv expect Visa’s profits to increase an average of almost 16% a year over the next half-decade.
Wall Street loves Visa every bit as much as they do Mastercard. All but three of the 40 analysts covering the stock call it a “Strong Buy” or Buy,” and it has no “Sell” ratings. BMO Capital analyst James Fotheringham recently reiterated his “Outperform” rating on V stock and raised his price target to $214 after the company beat second-quarter profit estimates.
It’s not just Wall Street pros and highflying hedge-fund managers who have taken a shine to Visa. The Oracle of Omaha loves the stock too. Berkshire Hathaway owns 10.6 million shares in Visa, worth roughly $1.7 billion.
Market value: $968.0 billion
Dividend yield: 1.4%
Analysts’ opinion: 17 strong buy, 2 buy, 17 hold, 0 sell, 3 strong sell
Buffett is a fan of numerous mega-cap Dow Jones components, and that includes Apple (AAPL, $205.28) – another hedge-fund darling.
Admittedly, tech stocks have never been Buffett’s forte, leading many to believe that the Apple pick was suggested by one of his lieutenants, Todd Combs and Ted Weschler.
Slower iPhone sales have knocked shares down from the 2018 highs that gave Apple a trillion-dollar market value, though the company has recovered in 2019 with a 29% climb that’s nearly double the market’s gain year-to-date. And both Buffett and hedge funds alike think AAPL has plenty of growth left.
The bull case, by the way, is that the company’s loyal customers don’t just buy one gadget – they buy numerous gadgets (iPhones, iPads and Macs), and they also buy into the rest of the ecosystem of software and services. In fact, amid sluggish sales of iPhones, the “next hope” for Apple is widely thought to be its high-margin Services division, which includes iTunes music and Apple Pay financial services.
Market value: $989.7 billion
Analysts’ opinion: 28 strong buy, 2 buy, 3 hold, 0 sell, 1 strong sell
Microsoft (MSFT, $129.15) continues its reign as the stock most popular with hedge funds and continues to grow like a weed, recently crossing the $1 trillion threshold for market value for a brief time.
Microsoft has staged a remarkable run over the past three years, delivering a total return (price appreciation and dividends) of more than 165%. For comparison’s sake, the Standard & Poor’s 500-stock index has returned roughly 49% on a total-return basis.
Thanks to the extended rally, MSFT is currently the world’s biggest company by market value.
Part of the success has come the same way Adobe’s has: by taking software and turning it into a subscription service. Microsoft also has become a cloud-computing giant with its Azure platform. Stifel analysts rate shares at “Buy,” viewing subscription products such as Azure and Office 365 as large, multi-year growth engines. More recently, RBC Capital analyst Ross McMillan raised his price target on Microsoft after strong quarterly reports, “with much of the upside driven by the highest gross margin segments (Windows / Server Products). McMillan has an “Outperform” rating on MSFT.
Analysts forecast average earnings growth of 14% a year for the next five years, according to a survey by Refinitiv. That’s impressive for a company that’s worth nearly $1 trillion.