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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| September 12, 2018
Hedge funds often are referred to as the market’s “smart money” because of their management’s longtime expertise and penchant for making good investing decisions. Sure, they don’t always live up to the hype, and they can be expensive. But they do comprise a large chunk of institutional investment dollars, and some do perform very well. So when you’re looking for the best stocks to buy, it pays to see what these hedge funds are doing.
As WalletHub points out, hedge funds currently have $3 trillion in assets under management. What they’re doing with those assets certainly is interesting, and perhaps even instructive.
Helpfully, WalletHub did a deep dive into which American 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 ranked 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 is no surprise that these stock picks are all household names.
Here’s a look at the 25 best stocks to buy, based on how heavily they’re held by hedge funds. Not every one of the following stocks is necessarily a buy at current prices, but there certainly are 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 Sept. 5, 2018, 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 Zacks Investment Research.
Market value: $201.8 billion
Dividend yield: 2.0%
Analysts’ opinion: 13 strong buy, 0 buy, 4 hold, 0 sell, 0 strong sell
Boeing’s (BA, $351.27) massive market value and blue-chip status – it’s a member of the Dow Jones Industrial Average – make it a natural home for hedge funds and other institutional investors.
A long record of consistent share-price outperformance also helps explain why the aerospace giant is so popular with the hedge-fund crowd. Boeing has easily beaten the broader market over the last one-, three-, five- and 10-year periods.
Although trade-war fears have made for a volatile 2018, BA stock continues to be a market-beater. Shares were up 16% for year-to-date through Sept. 11, vs. a gain of 7% for the S&P 500.
Analysts forecast Boeing to generate average annual earnings growth of 21% for the next five years, according to data from Thomson Reuters. With an average recommendation of “Buy,” analysts expect Boeing to keep flying high for the foreseeable future.
Market value: $90.6 billion
Dividend yield: N/A
Analysts’ opinion: 13 strong buy, 3 buy, 10 hold, 0 sell, 0 strong sell
Booking Holdings (BKNG, $1,909.50), formerly known as The Priceline Group, is a favorite of analysts and hedge funds alike thanks to its sheer scale and geographic reach.
The company’s portfolio of online travel and related websites includes Booking.com, Priceline, Agoda, Kayak, Rentalcars.com and OpenTable. Those properties allow BKNG to serve 220 countries and territories in more than 40 languages.
“While the online travel industry is not without its competitive risks, we believe the industry benefits from a great many secular tailwinds, on which BKNG is well positioned to capitalize,” write analysts at Wedbush equity research, who rate shares at “Outperform” (buy). “BKNG’s scale and geographical diversity give the company inherent advantages.”
Wall Street analysts expect the company to generate average annual earnings growth of more than 16% for the next five years, according to data from Thomson Reuters.
Market value: $184.5 billion
Dividend yield: 2.8%
Analysts’ opinion: 7 strong buy, 1 buy, 3 hold, 0 sell, 0 strong sell
Pharmaceutical giant Merck (MRK, $69.38) is a hit with hedge funds thanks to its blue-chip status, long-term wealth creation and a host of current blockbuster drugs.
Cancer-drug Keytruda, for example, is a runaway best-seller, having been approved for advanced melanoma, non-small cell lung cancer, head and neck cancer, classical Hodgkin lymphoma and bladder cancer. The pharmaceutical giant is seeking additional approvals for Keytruda for a wide range of other cancers. Bulls also point to strength in Januvia for diabetes, as well as Gardasil, a human papillomavirus vaccine.
“Merck has been and remains our Top Pick as we see room for significant upside to (profit) estimates as Keytruda continues its impressive rollout,” say Credit Suisse analysts, who rate shares at “Outperform” (buy).
Analysts expect Merck to generate average annual earnings growth of more than 7% for the next five years, according to data from Thomson Reuters. In addition to its pedigree as a component of the Dow Jones Industrial Average, Merck ranks among the 50 best stocks of all time.
Market value: $112.6 billion
Analysts’ opinion: 28 strong buy, 1 buy, 2 hold, 0 sell, 0 strong sell
Cloud-based services are all the rage now – just ask Alphabet (GOOGL), Amazon (AMZN) or Microsoft (MSFT) – but Salesforce.com (CRM, $148.83) is no newcomer to the field.
The company sells subscriptions to web-based applications to help companies increase and manage their sales and it refuses to back down. It’s expanding into data analytics and digital marketing, as well as making acquisitions to boost growth.
Analysts at Wedbush, who rate shares at “Outperform” (buy), say the company’s fundamentals look strong and investors should use any pullback in the stock to accumulate more.
Salesforce went public only 14 years ago and today the subscription-software juggernaut has a market value of almost $116 billion. Wall Street sees more outperformance ahead. Analysts forecast average annual earnings growth of 28% for the next five years, according to data from Thomson Reuters.
Market value: $217.9 billion
Dividend yield: 2.5%
Analysts’ opinion: 10 strong buy, 1 buy, 14 hold, 1 sell, 2 strong sell
As a mega-cap, blue-chip technology stock, it’s hard for the big money to avoid Intel (INTC, $47.26).
A component of the Dow Jones Industrial Average, Intel is as popular with active mutual fund managers as it is with their hedge fund cousins – even if analysts tend to be somewhat split on INTC’s prospects for outperformance.
On the one hand, INTC stock looks to be reasonably priced. It trades at 10.6 times expected earnings, according to data from Thomson Reuters. Analysts forecast earnings to grow at an average annual rate of 10.2% for the next five years.
On the other hand, although Intel remains the biggest player in making central processing units for back-end servers – which are very much in demand to power the rapid shift to cloud-based computing – the latest upgrade cycle may have peaked, say analysts at Stifel, who rate shares at “Hold.”
Market value: $224.3 billion
Dividend yield: 4.3%
Analysts’ opinion: 10 strong buy, 1 buy, 9 hold, 0 sell, 0 strong sell
With its massive market value and ample liquidity – an average of 13.8 million shares change hands every day – Verizon (VZ, $54.29) is perfect for hedge funds looking for dividends and defense.
The telecommunications giant is as blue-chip as they come. Indeed, it’s the sole telco in the Dow Jones Industrial Average. It’s also a Dividend Achiever, having hiked its payout every year since 2007.
Analysts at Credit Suisse rate shares at “Outperform,” noting that “competition has stabilized and wireless revenue is returning to sustainable growth.”
The company has a convoluted history. Verizon came out of the 1980s federal break-up of the old AT&T (T) on antitrust grounds. The company was initially known as Bell Atlantic. The name changed to Verizon as part of the 2000 merger of Bell Atlantic and GTE.
Through it all, however, Verizon has been one of the most productive stocks of our time. From 1984 to 2016, VZ delivered an annualized return of 11.2%, which created $165.1 billion in wealth.
Market value: $526.4 billion
Analysts’ opinion: 4 strong buy, 0 buy, 1 hold, 0 sell, 0 strong sell
If you can’t beat ’em, join ’em.
Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B, $212.88), is the world’s greatest value investor. His record going up again the broader market over long periods of time is second to none. 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 Warren 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 big stakes in everything from Apple (AAPL) to Bank of America (BAC) to Delta Air Lines (DAL) make it a diversified bet on the broader economy.
Market value: $127.2 billion
Analysts’ opinion: 15 strong buy, 1 buy, 7 hold, 0 sell, 0 strong sell
Adobe Systems (ADBE, $259.75) is one of Wall Street’s most highly rated stocks, so it should come as no surprise that it’s popular with hedge funds, as well.
With the likes of Photoshop, Premiere Pro for video editing and Dreamweaver for website design, among others, Adobe is absolutely dominant in its niche of creating software for designers and other creative types.
That’s a huge selling point with analysts. “Adobe has established itself as the unchallenged leader in creative software for both the enterprise and consumer markets,” say analysts at Stifel, who have a “Buy” rating on the stock. “We view Adobe as one of the most compelling investment cases in our coverage areas.”
Shares in Adobe have been outstanding in 2018, gaining 70% as of Sept. 11. The Nasdaq Composite index added 24% over the same time frame. Wall Street expects the software giant to deliver average annual profit growth of 24% for the next five years.
Market value: $235.6 billion
Analysts’ opinion: 18 strong buy, 3 buy, 5 hold, 0 sell, 0 strong sell
As a Dow stock with ample market value and liquidity, Home Depot (HD, $205.89) is a natural way for big institutional investors like hedge funds to bet on both the housing market and the U.S. economy.
Based on recent results at the nation’s largest home improvement chain, both the housing market and economy are doing fine. Credit Suisse rates HD at “Outperform,” citing higher home prices, aging homes and a stronger backdrop for consumer spending.
The rest of Wall Street tends to agree that this Dow stock is attractive at current levels. According to Zacks Investment Research, 18 analysts rate HD stock at “Strong Buy.” Three have it at “Buy,” while five say “Hold.”
Analysts surveyed by Thomson Reuters expect the company to generate average annual earnings growth of almost 15% for the next five years.
Market value: $194.7 billion
Dividend yield: 3.5%
Analysts’ opinion: 6 strong buy, 0 buy, 7 hold, 0 sell, 0 strong sell
Coca-Cola (KO, $45.77) is another bedrock stock that’s sort of hard to avoid if you’re a big institutional investor. It’s a Dow stock with massive market value and tremendous liquidity sitting smack-dab in the middle of the consumer staples sector.
With the U.S. market for carbonated beverages on the decline for more than a decade, according to market research, Coca-Cola has responded by adding bottled water, fruit juices, teas and other drinks to its product lineup. Its August 2018 acquisition of Costa Coffee was applauded by analysts.
“We view KO’s announced acquisition of Costa Limited for $5.1 billion as very positive and a big opportunity for KO over the long term since we see it as an accelerator of KO’s strategy to be the global beverage and coffee leader,” say Wells Fargo Securities analysts, who rate shares at “Outperform.”
In addition to being one of the 50 greatest stocks of all time, Coca-Cola also is an equity income fund’s dream come true. The company has raised its divided every year for 55 years.
Market value: $176.4 billion
Analysts’ opinion: 11 strong buy, 1 buy, 4 hold, 0 sell, 1 strong sell
As one of the nation’s largest banks by assets, Citigroup (C, $70.11) is a no-brainer holding for a wide swath of institutional investors, and hedge funds are no exception.
Analysts as a group are bullish on Citigroup’s fortunes, even as it’s lagged the broader market by a wide margin in 2018. “We’d argue that progress and potential is not yet fully embedded in Citi’s share price; we continue to recommend purchase,” say Credit Suisse analysts, who rate shares at “Outperform.”
Wall Street expects the money center bank to generate average annual earnings growth of almost 13% over the next five years, according to data from Thomson Reuters. Their average price target of $83.52 gives C stock an implied upside of about 19% in the next 12 months or so.
Although Citigroup’s stock lags the broader market over the trailing one-, three- and five-year periods, its massive market value, share liquidity and central place in the financial system help ensure its popularity among professional asset allocators.
Market value: $367.2 billion
Dividend yield: 2.7%
Analysts’ opinion: 7 strong buy, 2 buy, 7 hold, 0 sell, 0 strong sell
Dow component Johnson & Johnson (JNJ, $136.87) has had its ups and downs over the years, but there’s a reason it’s the largest health-care stock by market value in the world. From 1944 through 2016, steady growth and a dependable dividend allowed JNJ to deliver an annualized return of 15.5%, making it the seventh-best dividend stock of all time.
JNJ 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.
Hedge funds seeking exposure to big companies in the health-care sector can’t really avoid JNJ. It’s also a dividend payer extraordinaire, having hiked its payout every year for more than half a century.
Market value: $164.6
Dividend yield: 2.1%
Analysts’ opinion: 12 strong buy, 1 buy, 3 hold, 0 sell, 0 strong sell
Cable, broadband and media giant Comcast (CMCSA, $35.92) is one of Wall Street’s best-rated stocks, so it should come as no surprise that it’s highly popular with hedge funds, as well.
It’s also a big hit with active mutual fund managers and just happens to be one of the 50 best stocks of all time. CMCSA generated an annualized return of 12.4% from 2002 to 2016. That was good for lifetime wealth creation of $147 billion.
Comcast, which also owns NBC Universal, dropped out of a bidding war with Walt Disney (DIS) to acquire most of 21st Century Fox (FOXA). It then made a $34 billion bid for 61% of European pay-TV giant Sky (SKYAY). The attendant uncertainty has weighed on CMCSA stock throughout 2018, but analysts remain buoyant on the name. Jefferies Equity Research says Comcast is a “franchise pick” for investors’ portfolios.
Market value: $150.9 billion
Analysts’ opinion: 18 strong buy, 2 buy, 9 hold, 0 sell, 2 strong sell
No wonder hedge funds love Netflix (NFLX, $346.46). Shares in the streaming media company have crushed the broader market over the trailing one-, three- and five-year periods. Heck, for 2018 alone, NFLX was up 73% through Sept. 10. The Nasdaq gained 13% over the same span.
Whether NFLX stock can maintain its torrid pace remains to be seen, but analysts are certainly optimistic about its bottom-line prospects. The Street forecasts average annual earnings growth of 62% for the next five years, according to data from Thomson Reuters.
Shares have cooled off since Netflix reported lower-than-expected subscriber growth in July, but a number of analysts see the pause as a buying opportunity.
“This expensive stock may take some time to find bullish footing again, but we continue to believe in the long-term value proposition for consumers and investors,” say Canaccord Genuity analysts, who rate NFLX at “Buy.”
Market value: $221 billion
Dividend yield: 0.5%
Analysts’ opinion: 21 strong buy, 2 buy, 3 hold, 0 sell, 0 strong sell
It seems like everyone loves Mastercard (MA, $212.77). The global payments processor is a major favorite of hedge funds and active mutual fund managers, too.
Mastercard also happens to have one of the highest average “Buy” recommendations among Wall Street analysts. And then there’s the imprimatur of the world’s greatest value investor. Warren Buffett’s Berkshire Hathaway (BRK.B) owns nearly 5 million shares in Mastercard worth about $1 billion.
Analysts at Wedbush rate MA at “Outperform,” citing the company’s strong growth trends, unique strategy and robust global brand.
Mastercard has proven to be a wise investment. In the past two years, MA stock has more than doubled, vs. a gain of just 35% for the S&P 500. Analysts project earnings growth to average 23% a year for next five years, according to data from Thomson Reuters.
Market value: $308.1 billion
Dividend yield: 1.9%
Analysts’ opinion: 8 strong buy, 2 buy, 7 hold, 0 sell, 0 strong sell
No wonder Bank of America (BAC, $30.85) is so popular with the hedge-fund crowd. 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 nearly doubled in the past two years. JPMorgan Chase (JPM) gained 73% over the same time frame, while Citigroup added 50%. Wells Fargo (WFC), hamstrung by scandal, gained just 27%.
Analysts are looking for Bank of America to deliver earnings-per-share growth of 38% 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 is Bank of America’s top shareholder with a 6.8% stake in the firm. The BAC stake, worth roughly $21 billion, is Berkshire’s third-most valuable holding after Apple and Wells Fargo.
Market value: $321.5 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, $144.50) 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. Analysts polled by Thomson Reuters expect Visa’s profits to increase an average of 19% a year over the next half-decade.
Analysts at Wedbush, who rate shares at “Outperform,” cite “healthy global economic fundamentals,” as well as Visa’s “attractive business model, growth prospects and outlook for increasing shareholder returns.”
But it’s not just analysts and 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 owns 10.6 million shares in Visa, worth roughly $1.5 billion.
Shares in Visa have nearly tripled over the past five years.
Market value: $259.5 billion
Dividend yield: 1.3%
Analysts’ opinion: 14 strong buy, 2 buy, 0 hold, 0 sell, 0 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, $269.65). With 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 triple on a price basis. The S&P 500, meanwhile, is up just 68% over the same time frame.
Analysts expect UnitedHealth’s earnings to increase an average of 15% annually for the next five years, according to data from Thomson Reuters. If they’re right, UNH should continue its winning ways.
Market value: $383.4 billion
Analysts’ opinion: 7 strong buy, 1 buy, 7 hold, 0 sell, 0 strong sell
JPMorgan Chase (JPM, $114.10) 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 was up nearly 27% for the 52 weeks ended Sept. 10. The S&P 500 gained 16% over the same span.
Bulls are looking forward to more outperformance in the year ahead. 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.
“JPMorgan represents the value inherent in the universal banking model,” Credit Suisse notes.
Market value: $279 billion
Dividend yield: 2.9%
Analysts’ opinion: 10 strong buy, 1 buy, 9 hold, 0 sell, 3 strong sell
Despite a seemingly never-ending stream of bad press, Wells Fargo (WFC, $57.93) remains popular with hedge funds, a plurality of analysts, Warren Buffett and active mutual fund managers too.
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.
Years of share-price underperformance stemming from a phony accounts scandal could be dismissed by long-term investors as a transitory setback, but hedge funds aren’t necessarily known for their patience.
“Recurrence of negative headlines is no longer shocking but still represents an unfortunate development and could impact the stock near-term,” note analysts at Sandler O’Neill and Partners, who rate WFC at “Buy.” Don’t be surprised if WFC proves to be less popular with hedge funds going forward.
Market value: $818.7 billion
Analysts’ opinion: 23 strong buy, 4 buy, 2 hold, 0 sell, 0 strong sell
You can’t fault hedge funds for loving Google parent Alphabet (GOOGL, $1,183.99). 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.
Alphabet also is home to self-driving car startup Waymo, and Nest Labs, a developer of gadgets for the Internet of Things. Farther afield, the company 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 was up 25% over the 52 weeks ended Sept. 10 vs. a 16% gain for the S&P 500, and the great majority of analysts expect more outperformance ahead. Shares currently sell for 24 times forward earnings, which is reasonable given that profits are forecast to increase an average of 18% a year for the next five years.
Market value: $469.3 billion
Analysts’ opinion: 24 strong buy, 3 buy, 5 hold, 0 sell, 0 strong sell
Privacy concerns and growing fears of regulation haven’t really dented Facebook’s (FB, $162.53) popularity with mutual fund managers, hedge fund managers or analysts.
At least not yet. And with good reason. The bottom line is that the world’s most popular social network has more than 2.1 billion active users, and advertisers are keen to reach all those eyeballs.
Facebook also 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, analysts still expect revenue and earnings per share gains of 37% and 33%, respectively, this year.
Market value: $1.08 trillion
Analysts’ opinion: 10 strong buy, 1 buy, 13 hold, 0 sell, 0 strong sell
It’s a no-brainer that one of the best stocks of all time would be a hedge-fund darling.
Berkshire Hathaway (BRK.B) is no hedge fund – far from it – and it’s buying all the Apple (AAPL, $223.10) it can get. Chairman and CEO Warren Buffett pumped another $12 million into the the world’s most valuable company in the second quarter.
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. It became the first U.S. company to top $1 trillion in market value in August. Analysts expect earnings to rise another 28% this year alone.
Market value: $955.1 billion
Analysts’ opinion: 29 strong buy, 2 buy, 1 hold, 0 sell, 1 strong sell
From Wall Street analysts to mutual fund managers, everyone loves Amazon.com (AMZN, $1,958.31). It’s only natural that hedge funds do too.
Amazon briefly touched $1 trillion in market value recently. At the same time, the e-commerce giant, which did not prioritize profits for years and years, is forecast to generate average annual earnings growth of 46% for the next half-decade. That’s an astonishing growth rate for a company of Amazon’s size.
“The fundamental momentum remains about as strong as it could be,” note Canaccord Genuity analysts, who rate AMZN at “Buy.”
Hedge funds are expected to deliver outperformance. They simply cannot ignore Amazon.
Market value: $833.8 billion
Dividend yield: 1.5%
Analysts’ opinion: 22 strong buy, 1 buy, 2 hold, 1 sell, 0 strong sell
There’s something wonderful about boring old Microsoft (MSFT, $108.74) 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 45% over the past year, beating Alphabet’s and Facebook’s gains by about 20 percentage points and 50 percentage points, respectively. (Amazon has just about doubled over the same span.)
Analysts expect more such outperformance to come. William Blair Equity Research has “Outperform” rating on the stock, noting that Microsoft’s “stellar” results are being driven by continued strength in corporate IT spending and solid execution across all three business segments.
It looks like Microsoft’s amazing second act has made it No. 1 in hedge funds’ hearts.
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