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20 Stocks Hedge Fund Managers Are Buying In Bulk

Hedge funds bounced back in 2018 and these are the stocks that helped them win

By Luke Lango, InvestorPlace Contributor

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Hedge fund managers are supposed to be some of the best stock-pickers in the world.

While that hasn’t necessarily been true for the past several years (hedge fund returns have been choppy during that stretch while the market has simply roared higher), hedge fund managers seem to be getting their groove back in 2018.

So far this year, hedge funds are by-and-large outperforming the S&P 500. What is driving this out-performance? Some big bets on some even bigger names.

With that in mind, here’s a list of 20 stocks that hedge funds currently own in bulk, according to RBC Capital Markets:

Facebook Inc (FB)

Hedge Fund Allocation: 1.7%
Percent of Hedge Funds That Own: 40%

The hedge fund world’s favorite stock is tech giant Facebook, Inc. (NASDAQ:FB). Despite the company’s recent PR troubles, Facebook sitting atop the hedge fund favorites lists makes a ton of sense.

This company is a money-making machine with 50% revenue growth and 50% margins. The company also has a huge moat in the form of 2 billion-plus monthly active users, a moat that gives it more data and reach than any other social media platform and thus makes it a global digital advertising giant that every company needs to be on.

Despite the big growth, big margins, and big moat, Facebook stock still trades at less than 25-times forward earnings. That multiple is anemic next to 50%-plus revenue growth and 50%-plus earnings growth.

Moreover, it looks like hedge funds believe that Facebook has put its worst PR incident in history behind it. If so, then valuation on FB stock should normalize, and this stock could be a big winner over the next several quarters and years.

Alphabet Inc (GOOG)

Hedge Fund Allocation: 1.7%
Percent of Hedge Funds That Own: 35%

Much like Facebook, the hedge fund world’s second favorite stock, Alphabet Inc (NASDAQ:GOOG), is a big growth company trading at a relatively discounted valuation.

Largely due to its advertising business but also thanks to tangential growth businesses like Cloud and smart home, Google has been able to consistently grow revenues north of 20% per year despite increasing scale. Moreover, because Google search is a part of the underlying fabric of the internet, so long as internet usage continues to rise, Google’s relevance and advertising revenues will grow, too.

Right now, there are some concerns about Google’s margins. They are slipping back. But recent margin compression is mostly due to big long-term investments. Those long-term investments are going towards Google’s biggest growth businesses of tomorrow, like AI, Cloud and Waymo, the company’s massive self-driving unit. Eventually, those investments will peel back, and what will take their place is super-charged growth.

Consequently, near-term margin compression isn’t a long-term concern. Thus, the stock’s 24-times forward earnings multiple seems dirt cheap for a hyper-growth tech giant with as strong of growth prospects as Google.

Microsoft Corporation (MSFT)

Hedge Fund Allocation: 1.5%
Percent of Hedge Funds That Own: 31%

A lot of hedge fund managers are bullish on the cloud transition taking place at Microsoft Corporation (NASDAQ:MSFT).

Back in 2014, Satya Nadella took over as CEO of Microsoft and promised a bright future for the company through various cloud initiatives. Nadella pushed forward with that vision, and Microsoft hasn’t looked back since. Now, the company is behind one of the largest and fastest growing cloud businesses in the world.

Judging by the fact that nearly a third of hedge funds own MSFT stock, it is pretty clear that hedge fund managers believe MSFT’s cloud transition is far from over. But it also pays to remember that cloud is only a part of the Microsoft business and that the other parts (namely hardware sales) are very low-growth. As a result, despite robust cloud growth, Microsoft’s revenue growth is persistently below 20%.

Despite that low-growth nature, bullishness regarding MSFT’s cloud growth potential has pushed the forward earnings multiple on MSFT stock up to 25, which is above Facebook and Google’s forward earnings multiples. As such, valuation currently seems out of sync with growth when it comes to MSFT stock, and I’m not so sure I agree with the hedge fund bullishness on this name.

Amazon.com, Inc. (AMZN)

Hedge Fund Allocation: 1.1%
Percent of Hedge Funds That Own: 29%

Digital retail and cloud giant Amazon.com, Inc. (NASDAQ:AMZN) is the stock that value investors love to hate due to its huge valuation and anemic profitability. But hedge fund managers are apparently looking past that because nearly a third of them own AMZN stock.

What’s the bull thesis here? Amazon is a hyper-growth company with multiple hyper-growth levers. Front and center is the company’s digital commerce business, which continues to benefit from a secular shift toward digital shopping. Amazon is also behind the world’s largest public cloud business in Amazon Web Services. And the company is building out a massive offline retail presence through Whole Foods, retail pop-ups and bookstores.

But perhaps the biggest growth lever at Amazon is Amazon Prime. Recent prices hikes at Prime show that Amazon has a unique ability to grow average revenue per user substantially without much churn.

Yes, profits are slim at Amazon. But the company has also shown an ability to slow investments and ramp up profitability whenever it wants to. Thus, when Amazon wants to ramp up profits and stop growing, it will do that. At that point in time, earnings will roar higher, and this ostensibly expensive stock will start to look rather cheap.

Time Warner Inc (TWX)

Hedge Fund Allocation: 0.9%
Percent of Hedge Funds That Own: 25%

This is a rather interesting stock to see thrown in as a hedge fund favorite among a bunch of hyper-growth tech giants. But the upside hedge fund managers see in Time Warner Inc (NYSE:TWX) is through M&A.

This company is supposed to be acquired AT&T Inc. (NYSE:T) in the near future. While regulation may prevent the proposed merger from going through, hedge funds are clearly betting on regulation not stopping this acquisition.

Beyond the M&A catalyst, there really isn’t much to like about TWX stock here and now. It is a low-growth company with some serious problems thanks to cord-cutting. But if the AT&T acquisition does go through, then TWX stock will head higher regardless.

Netflix, Inc. (NFLX)

Hedge Fund Allocation: 0.8%
Percent of Hedge Funds That Own: 19%

Welcome back to the land of hyper-growth tech giants. The sixth most owned stock by hedge funds is Netflix, Inc. (NASDAQ:NFLX), the streaming giant that is seemingly marching toward world domination of the at-home entertainment industry.

Like Facebook, Google and Amazon, Netflix is a big top-line grower (40%-plus). Subscriber growth is also big, and margins are starting to accelerate higher. Moreover, the subscriber base is still relatively small at just 125 million global subs (versus 1.6 billion global internet households), while profitability is also still anemic (just 12% operating margins), so this company has big growth visibility over the next several years.

Valuation is a concern when it comes to NFLX stock at the present moment. But longer-term, Netflix’s service is simply too cheap, too convenient, and too good not to be adopted by a majority of internet households in the world.

As such, this growth story is just getting started, and the five-to-ten-year outlook for this company is quite promising.

Visa Inc (V)

Hedge Fund Allocation: 0.7%
Percent of Hedge Funds That Own: 23%

One of the hedge fund world’s favorite non-technology stocks is Visa Inc (NYSE:V).

The whole growth narrative at Visa centers around the secular shift in the payments industry away from cash and toward cards and digital payments. As this shift plays out and cash transactions decrease, the number of transactions flowing through Visa increases.

That is why the company posted 13% revenue growth last quarter on 11% payment volume growth and 12% processed transactions growth. Moreover, those double-digit growth figures happened with just 4% card growth. Clearly, card usage per capita is rapidly growing, and that is a great thing for Visa stock.

Meanwhile, margins are steady and the stock isn’t that expensive (28-times forward earnings), so it makes sense that hedge funds like this secular growth stock.

Aetna Inc (AET)

Hedge Fund Allocation: 0.7%
Percent of Hedge Funds That Own: 19%

The hedge fund world’s favorite healthcare stock is Aetna Inc (NYSE:AET), and it looks like the bullishness on this name is mostly a result of a favorable valuation set-up.

The big upside in Aetna stock is through M&A. CVS Health Corp (NYSE:CVS) wants to acquire Aetna at around $200 per share. The stock currently trades around $175, so there is visibility to 15% upside in a hurry.

Meanwhile, if the deal doesn’t go through, Aetna stock shouldn’t fall by much. Earnings next year are expected to be around $12 per share. A market-average 16-times forward earnings multiple on those $12 implies a year-end price target of $192.

Thus, no matter which way you look at it, Aetna stock should head higher into the end of the year, with or without the M&A catalyst.

Twenty-First Century Fox Inc (FOXA)

Hedge Fund Allocation: 0.7%
Percent of Hedge Funds That Own: 15%

The second traditional media company on this list is Twenty-First Century Fox Inc (NASDAQ:FOXA), but much like TWX, I chalk up smart money’s bullishness on this name to M&A more than anything else.

The underlying business dynamics at FOXA aren’t great. Revenues are in decline, and the company has huge exposure to persistent cord-cutting headwinds which are plaguing the whole cable industry.

But FOXA stock has some nice catalysts through M&A. Firstly, Walt Disney Co (NYSE:DIS) is attempting to acquire certain entertainment assets from FOXA. Secondly, the whole media industry is rapidly consolidating to fight off rising competition from the technology sector, so the rest of FOXA could be scooped up by any number of media giants over the next several quarters.

As such, the whole bull thesis on FOXA is through M&A. Without M&A, there isn’t much to like about the stock here and now.

Bank of America Corp (BAC)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 24%

The top bank stock, according to hedge funds, is Bank of America Corp (NYSE:BAC).

The whole bull thesis on BAC rests of three things: tax cuts, deregulation, and higher rates. Tax cuts are already done, so that is a tailwind that is already baked in and will help earnings growth and economic activity over the next several years.

Deregulation is coming, as Congress just rolled back Dodd-Frank, so less regulation will be an operating tailwind for BAC over the next several quarters and years.

But when it comes to higher rates, I’m not so sure that is going to happen. Yes, the economy is at full employment, wages are rising, and rates are heading higher in the near-term. But longer-term, automation presents a huge risk to the jobs economy and inflation. Thus, longer-term, rates may actually be stuck at historically low levels.

BAC stock has run up quite a bit on the idea that all three of these tailwinds will super-charge growth. So if one of the three tailwinds doesn’t materialize, then BAC stock could drop pretty sharply. As such, while I understand the bull thesis on BAC stock, I’m not convinced there is enough firepower through higher rates to give this stock more lift.

Constellation Brands, Inc. (STZ)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 15%

Hedge funds are betting big on alcohol.

Constellation Brands, Inc. (NYSE:STZ), the company behind Corona, Svedka, Nobilo, and many more, is owned by roughly 15% of all hedge funds. The bet has worked out thus far, as STZ stock is up more than 80% over the past 3 years.

But things may be changing in the beer, wine, and spirits world. Namely, marijuana is becoming increasingly legal in some states. And in those states where medical marijuana is legal, alcohol sales have dropped by 15%. Current trends indicate that the widespread legalization of medical and recreational marijuana is just around the corner, so the alcohol industry could take a big hit in the near future as a result of that legalization.

The problem with STZ stock is that it isn’t a big grower, but it gets a big valuation because of its steady growth prospects. Those steady growth prospects look a lot less steady with legal marijuana. As such, the valuation could take a big hit, and STZ stock could drop.

Adobe Systems Incorporated (ADBE)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 18%

Cloud king company Adobe Systems Incorporated (NASDAQ:ADBE) is owned by nearly 20% of all hedge funds for one simple reason: it is a big growth company with mitigated competitive risks and a relatively cheap valuation.

Adobe dominates the niche and specialized creative solutions part of the cloud market. There really aren’t any competitors in this space, and the net result is big revenue growth on top of huge margin growth.

This big and sustainable revenue and earnings growth doesn’t seem appropriately reflected in the valuation. ABDE stock trades at less than 40-times forward earnings.

While that may seem expensive on its face, consider that Adobe is expected to grow revenues by 20% this year and earnings by 50%. Against 50% earnings growth, a 40-times forward multiple doesn’t seem all that unreasonable.

Broadcom Inc (AVGO)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 18%

Hedge fund managers’ favorite semiconductor stock is Broadcom Inc (NASDAQ:AVGO).

The bull thesis on AVGO is pretty straight-forward. The whole semiconductor space is red-hot right now thanks to huge demand catalysts from the Internet of Things, Big Data, cloud data-center migration, AI, and next-gen gaming. These demand catalysts have longevity, and as such, the backdrop in the semiconductor market will remain favorable into the foreseeable future.

AVGO stock, however, is hardly priced for this. The stock currently trades at just 12-times forward earnings, a rather anemic multiple considering the company’s broad exposure to multiple secular growth industries.

Altogether, then, AVGO is a case of big growth converging on a discounted valuation, much like the hedge fund world’s two favorite stocks, GOOG and FB. Because of this dynamic, AVGO stock should be an outperformer over the next several years.

Monsanto Company (MON)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 16%

There really isn’t much to say about Monsanto Company (NYSE:MON) from an investment perspective outside of the fact that hedge fund bullishness on the name is due entirely to M&A.

German drug and crop chemical maker Bayer is seeking to purchase Monsanto for around $128 per share. This proposed deal is clearing all the necessary regulatory hurdles, and it looks quite likely that the deal will pass very soon.

As such, hedge funds are piling into the name ahead of the $128 acquisition actually materializing.

Micron Technology, Inc. (MU)

Hedge Fund Allocation: 0.6%
Percent of Hedge Funds That Own: 19%

Although hedge funds like Broadcom the most of all semiconductor stocks, Micron Technology, Inc. (NASDAQ:MU) is a close second.

And with good reason.

MU stock is benefiting from all those same robust demand catalysts as AVGO, including the Internet of Things, Big Data, cloud data-center migration, AI, automation, and next-gen gaming. But because MU’s earnings history is exceptionally lumpy as a result of the notorious semiconductor cycle, MU stock trades at just 5-times forward earnings because investors think this year represents peak earnings.

Even if it does represent peak earnings, though, Micron’s demand catalysts are so strong that the next down-cycle in earnings will be muted relative to previous down-cycles. As such, MU stock is looking at potential earnings degradation over the next several years, not an earnings wipe-out.

But the stock is priced for an earnings wipe-out, and that discrepancy between reality and valuation is why hedge funds are loading up on MU.

Booking Holdings Inc (BKNG)

Hedge Fund Allocation: 0.5%
Percent of Hedge Funds That Own: 19%

Hedge funds are loading up on Booking Holdings Inc (NASDAQ:BKNG) largely thanks to a boom in worldwide travel, led in part by the rapid urbanization of developing economies and also in part by the experience-first mantra of millennials who would rather travel than settle down. As a result of these secular tailwinds, BKNG has rattled off several quarters in a row of double-digit revenue growth and even more robust profit growth.

This growth isn’t expected to slow by all that much. Over the next 2 years, revenue and earnings growth are both expected to be in excess of 10%.

The current 23-times forward earnings multiple on BKNG does seem rather expensive. After all, Facebook and Google trade at 25-times forward earnings, and those are 20%-plus long-term earnings growth stories. From this perspective, BKNG’s pairing of 10%-plus earnings growth and a 23-times forward multiple isn’t all that attractive.

Overall, while BKNG is propped up by strong secular tailwinds, the valuation fully reflects upside from those tailwinds, and further gains in the stock will be hard to come by.

Electronic Arts Inc. (EA)

Hedge Fund Allocation: 0.5%
Percent of Hedge Funds That Own: 17%

There are a few reasons why hedge funds like Electronic Arts Inc. (NASDAQ:EA) stock so much.

First, the whole video game publisher world is benefiting from a shift towards downloadable content and micro-transactions. These in-game purchases and content add-ons allow video game makers to rake in significantly more money per video game player. This additional per capita revenue is high-margin, so micro-transactions are additive to profits.

Second, eSports is here. And one of the headline players in the eSports world is EA, whose “Madden NFL” eSports league will be streamed on ESPN. As eSports grow in popularity and go mainstream, EA has a unique opportunity to build out a massive advertising business to accompany its video game portfolio.

As such, EA stock is a pure play on eSports growth. The stock is priced expensively because there is a lot of optimism regarding eSports growth. But if growth does live up to the hype, then EA stock could be a big winner.

Apple Inc. (AAPL)

Hedge Fund Allocation: 0.5%
Percent of Hedge Funds That Own: 20%

The world’s biggest company is also one of the stocks most beloved by hedge funds.

By now, it is pretty clear that the hardware business at Apple Inc. (NASDAQ:APPL) is drying up. Everyone who has or wants an iPhone, iPad, or Mac pretty much already has one. The only real growth on the hardware side is through Apple Watch and various other Apple smart home products, the sum of which won’t offset slowing iPhone growth.

But the bull thesis on Apple has almost nothing to do with that dried up hardware business. Instead, it has everything to do with the burgeoning software business.

Apple is finally figuring out how to monetize its massive iOS ecosystem through various services like iCloud, App Store, and iTunes. This business is on-fire right now, and it is a particularly high margin business. Thus, as Apple pivots from largely just hardware to hardware and software, revenues will grow and profits will grow by even more.

All in all, iPhones may have driven Apple stock to this point, but the growth driver over the next several years will be the company’s Services business.

UnitedHealth Group Inc (UNH)

Hedge Fund Allocation: 0.5%
Percent of Hedge Funds That Own: 17%

When it comes to the stock market, there are few things as steady as UnitedHealth Group Inc (NYSE:UNH), and that is likely why hedge funds own this stock in bulk.

Over the past 5 years, UNH stock has risen nearly 300% in almost linear fashion. Compared to other big-growth stocks, there really hasn’t been much volatility, as during the past 5 years while the stock soared 300%, the biggest dip was just 12%.

Today, the growth narrative is as good as ever. Revenues rose 13% last quarter. Operating profits rose by 19%. Net profit margins expanded. Every operating segment saw double-digit operating profit growth.

But, UNH stock is also running up against some valuation friction. The stock’s 19-times forward earnings multiple isn’t big, but it is bigger than the 5-year average forward earnings multiple of 16. Also, the dividend yield is just 1.2%, below the 5-year average of 1.4%.

All in all, UNH is a steady grower, but the stock looks challenged in the near-term by valuation friction.

Mastercard Inc (MA)

Hedge Fund Allocation: 0.5%
Percent of Hedge Funds That Own: 19%

Much like Visa, Mastercard Inc (NYSE:MA) is benefiting from a secular shift in the payments world away from cash and towards card and digital payment methods. This shift has propelled largely positive results for MA, as 6% adjusted card growth last quarter fueled 14% gross dollar volume growth.

MA stock is somewhat expensive at 30-times forward earnings, but the cash-less payments pivot provides strong secular tailwinds for operating growth over the next several years.

As such, this stock is just like Visa: a bit pricey, but supported by a strong growth narrative that has longevity. Consequently, the stock should be able to grind higher into the foreseeable future despite an ostensibly large valuation.

As of this writing, Luke Lango was long FB, GOOG, AMZN, T, DIS, ADBE, MU and AAPL. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/hedge-funds-stocks-buying-in-bulk/.

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