What stocks are hedge funds backing? It’s a simple question with only a somewhat simple answer. While finding some of the top hedge fund stocks isn’t that hard necessarily, that doesn’t mean they’re guaranteed to outperform.
Hedge funds want stocks with attractive qualities. That typically comes in the form of growth and a history of strong performance. It also means strong liquidity.
Not that every hedge fund only looks for liquidity, but for the top hedge fund stocks, it’s certainly going to play a role. When tens of billions of dollars can change hands in an instance, it needs to be in stocks that can handle that type of volume.
Size is one thing, but dependability is another. With this list of top hedge fund stocks, you’ll find plenty of dependability. Let’s look at them now.
- Apple (NASDAQ:AAPL)
- Bank of America (NYSE:BAC)
- Microsoft (NASDAQ:MSFT)
- Amazon (NASDAQ:AMZN)
- American Express (NYSE:AXP)
- Visa (NYSE:V)
- Nvidia (NASDAQ:NVDA)
Hedge Fund Stocks: Apple (AAPL)
Let’s start with the biggest name in the bunch: Apple.
I don’t think anyone is that surprised to see this name on a list of favorite hedge fund stocks, right? Apple has long been one of the most popular names in the investing world. That’s true for both fund managers and retail investors alike.
If we look at the S&P 500 index and the Nasdaq 100 index, Apple makes up 5.9% and 11.3% of these indexes, respectively. That’s thanks to its $2.4 trillion market cap.
For what it’s worth, AAPL stock also holds the top weighting of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) public holdings. Weighing in at more than $130 billion, Berkshire’s Apple stake is more than three times the size of the next largest holding, (which is Bank of America).
Berkshire Hathaway isn’t technically a hedge fund, but given the size of its stake in Apple, it’s certainly worth mentioning.
The frustrating part for many investors? Apple continues to demolish analysts’ expectations, yet the stock continues to struggle for momentum. In the last five quarters, Apple has generated roughly $406 billion in revenue and has beat consensus estimates by about $37 billion. That’s incredible and it’s no wonder Apple is a hedge fund favorite.
Bank of America (BAC)
Speaking of Berkshire’s second-largest holding, Bank of America draws quite the interest when it comes to hedge funds. In fact, among funds, Berkshire is the largest holder of BAC stock, with more than 1.1 billion shares in its portfolio. The next largest holder is Vanguard, with “just” 621 million shares.
Bank of America isn’t the largest bank when it comes to market capitalization, as that title belongs to JPMorgan (NYSE:JPM). However, at roughly $330 billion, BofA is no small fish.
More than 73% of Bank of America’s float is owned by institutions. Given its size, this is fairly impressive.
Funds can’t only have exposure to tech. In many cases (and as you’ll see throughout this list), they also need exposure to different sectors. With its strong liquidity and big size, Bank of America makes the list.
Hedge Fund Stocks: Microsoft (MSFT)
If Apple is one of the top hedge fund stocks, it’s not surprising to see Microsoft is one, too. It trails Apple in market cap, but not by much, weighing in at $2.15 trillion.
I think there’s a big catalyst when it comes to these names and that’s liquidity. Microsoft might not be the most exciting growth story out there these days, but it’s one of several names where the liquidity is nearly endless. Not to mention, it’s as dependable as they come.
With many names on this list, hedge funds can shift around billions of dollars without creating any sort of discernible impact on the stock price. If someone were to sell $100 million worth of MSFT stock or a $1 billion worth, it wouldn’t raise an eyebrow. Heck, even $10 billion worth of Microsoft stock is just 0.46% of its total market cap.
I mean, there aren’t many securities where funds can get that kind of liquidity without creating issues. Further, Microsoft moves well versus the Nasdaq and S&P 500 while commanding a strong balance sheet and solid growth. In that sense, funds can gain near-instant exposure to the tech sector with incredible liquidity and impressive quality.
Another name that can give managers that? Well, just see below.
If Amazon would just split its stock price, it would likely gain even more liquidity. It surely has plenty of it with its $1.7 trillion market cap, but it would be a lot easier for funds to move around if it didn’t have such a wide spread thanks to its expensive stock price.
Either way though, AMZN stock provides great exposure for fund managers looking for a bit more growth vs. the value they can find in Apple and Microsoft. Regardless, if a tech manager wants to plow funds into Apple, Microsoft and Amazon, they can do so easily. The same could be said for every stock on this list.
For Amazon specifically, the company just reported a rare revenue miss in July. Along with disappointing guidance, it sent the stock tumbling 7.5%.
Does that make it a no-touch? I wouldn’t say that necessarily. It’s clear that the stock isn’t trading great in its first quarter without Jeff Bezos serving as CEO. However, Amazon is still Amazon. It dominates e-commerce and its AWS unit could easily be a standalone entity.
Shares may ebb and flow, but this one isn’t going anywhere. Not with analysts expecting 27% revenue growth this year and almost 20% next year. Or with roughly back-to-back forecasts of 30% earnings growth in 2021 and 2022, respectively. In other words, this is a mega-cap tech stock with solid liquidity and plenty of growth left in the tank. That’s going to draw in buyers regardless of its sluggish price action.
Hedge Fund Stocks: American Express (AXP)
Shifting back to the financials, American Express comes into play. Not to bring Warren Buffett into every discussion, but AXP stock is Berkshire’s third-largest holding, weighing in at $25.8 billion. However, it’s worth mentioning that Berkshire’s stake is almost 20% of the entire company.
Keep in mind, American Express commands a market cap of “just” $135 billion. While that doesn’t make it a small company necessarily, it’s pretty small when compared to the companies on this list. In fact, the next smallest is BofA, which is roughly 2.5 times larger than AXP.
In a year where economists are expecting a robust rebound in the economy, consumer credit card companies are in focus. Consensus expectations call for double-digit revenue growth both this year and next, and for 100% earnings growth this year.
If American Express reports in-line results, it will be trading at roughly 22 times this year’s earnings. With consensus expectations calling for 22% earnings growth next year, no wonder shares are hovering near all-time highs. And with the stock near all-time highs, no wonder it’s a favorite among hedgies.
We can’t talk about credit card companies and not talk about Visa. With its $525 billion market cap, Visa is the eighth-largest U.S. company.
Visa is one of my favorite companies, because its business is so simple yet so profitable. It sports some of the most impressive profit margins in the market, as it acts as a toll booth operator between merchants and consumers. That’s true whether we’re talking about online merchants and online shoppers, or in-person retail.
That’s another part of the bullish thesis: As more spending shifts online, Visa and other credit card operators are there to soak up the additional payments volume. As more and more transactions shift from cash and check to debit and credit, Visa and its peers continue to see global growth.
Before the Covid-19 disruption, Visa sported gross profit margins north of 80% and profit margin north of 52.5%. Over time, we should see the business get back toward those levels. In fact, they’re not far off now.
As the world continues to evolve, Visa has quietly evolved along with it. While critics continue to criticize its valuation, V stock continues to do one thing: trend higher.
Hedge Fund Stocks: Nvidia (NVDA)
While Visa is the eighth-largest company in the U.S., Nvidia is just behind it, clocking in at No. 9. However, that may change in the years to come as Nvidia continues to lay the foundation for the tech sector.
Seriously, it’s the foundation for so many different technologies, it’s too hard to ignore. Whether it’s autonomous driving, cloud computing, data centers, graphics, supercomputing or artificial intelligence, Nvidia has its hands in all of it.
Like Visa but with a bit more volatility, NVDA stock is a great way for hedge fund managers to gain some alpha. They can park their money there and while it may take some time, they will likely outperform the overall market. That is, if past performance is any barometer.
For instance, Nvidia stock is up 50% this year and more than 80% over the past 12 months. In the last three years, shares are up roughly 220% and over the last five years, Nvidia stock is up more than 1,100%. Despite some bumps in the road, this stock has been a monstrous performer. Visa and Nvidia are two examples of high-quality businesses and management that continue to perform well down the stretch. They are “easy” buy-and-hold components.
Additionally, Nvidia has continually topped analysts’ expectations. Consensus expectations continue to be conservative and have constantly climbed higher as demand for the company’s products remains elevated.
On the date of publication, Bret Kenwell held a long position in Nvidia. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.