Five Dow Jones Stocks That Can Outperform The Market

The Dow Jones Industrial Average (DJIA) comprises of 30 companies representing a diverse collection of stocks from all market sectors. These large cap stocks generally have high sales and profits and globally diverse operations. These companies are usually the trend setters in their respective fields and are considered to be relatively safe in the investor community. In this article we will try to identify the best of these stocks using our hedge fund sentiment indicator.

Given their 2 and 20 payment structure, hedge funds have more resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments. More recently the top 30 mid-cap stocks (market caps between $1 billion and $10 billion) among hedge funds delivered an average return of 18% during the last four quarters (S&P 500 Index funds returned only 7.6% during the same period). That’s why, we believe, using hedge fund sentiment as an additional screen to narrow down the blue chips may yield promising investment ideas. Here are our findings:

Merck is the fifth most popular Dow stock among hedge funds. During the third quarter, Merck & Co., Inc. (NYSE:MRK) saw a surge in the number of hedge funds having the stock in their portfolios increase to 84 from 66 in the quarter earlier. The value of their holdings also increased by 66% quarter over quarter. Among the funds we track, Israel Englander’s Millennium Management, D.E Shaw and Stanley Druckenmiller’s Duquesne Capital held stakes in the company. Millennium Management and Duquesne Capital bought 2.98 million and 0.68 million shares respectively of Merck & Co., Inc. (NYSE:MRK) during the quarter ending September. This mega-cap healthcare pharmaceutical company has returned 17% year to date and sports a dividend yield of 3%. For the third quarter, Merck & Co., Inc. (NYSE:MRK) reported revenues of more than $10.54 billion, beating consensus estimates by $360 million. The earning per share at $1.07 was also higher than the expected EPS of $0.98.

During the third quarter, the ownership of JPMorgan Chase & Co. (NYSE:JPM) among funds tracked by us inched down to 98 from 99 in the earlier quarter. But the total value of their holdings saw an increase of 5%. Amongst the funds that we track, Lansdowne Partners (UK) was one of the major holders of  JPMorgan Chase & Co. (NYSE:JPM) with 23,963,227 shares held. It was also the largest portfolio holding of  Lansdowne Partners (UK). Two Sigma Advisers also bought 384,012 shares of the stock as per their last 13F filing. The financial sector is performing extremely well because of the Trump win and a rising interest rate scenario. The stock is up 19.5% year to date and has an average overweight recommendation. The company has a dividend yield of 2.4% and announced a $10.6 billion share buyback program in June this year.

Visa stands at number 3. Investors covered by us with long positions in Visa Inc (NYSE:V) declined by 3 to 115 in the third quarter. But the value of their holdings increased to $10.26 billion from $9.33 billion quarter over quarter. Amongst the funds that we track, Dan Loeb’s Third Point, D.E Shaw, Steve Cohen’s Point72 Asset Management bought 2.1 million, 1.575 million and 0.815 million shares of Visa Inc (NYSE:V) respectively during the quarter ending September. Dan Loeb’s Third Point was amongst the top five largest buyers of the stock during the quarter. Visa Inc (NYSE:V) reported a high operating margin of 61% and a net profit margin of 45% for the quarter ending September. With a mean average recommendation of overweight, the stock has returned more than 250% in the last five years. Revenues increased to $4.26 billion which was a hike by $631 million quarter over quarter.

The second most popular Dow stock among hedge funds is Microsoft. While the number of funds tracked by us owning Microsoft Corporation (NASDAQ:MSFT) declined to 126 from 131 in the quarter earlier, it remained the second most popular Dow stock among the funds tracked by us. Andreas Halvorsen’s Viking Global Investors was the fourth largest buyer of Microsoft Corporation (NASDAQ:MSFT), having bought more than 8 million shares during the third quarter. Millennium Management also bought 4,197 million shares, increasing Microsoft Corporation’s (NASDAQ:MSFT) stake in its portfolio to 0.45% from 0.06% earlier. The new management has revitalized the company by focusing on cloud service and selling off/closing slow growing loss making segments such as mobile phones. The stock is trading very near the top of its 52 week high price of $61 and has returned more than 150% in the last five years. Out of the 34 analysts covering the stock, 21 have rated it as a buy while only 2 analyst thinks it as a sell. Analysts expect Microsoft Corporation (NASDAQ:MSFT) to report EPS of $2.96 this year.

Apple Inc. (NASDAQ:AAPL) is the most popular Dow stock among the hedge funds that we follow. The world’s most valued company saw its hedge fund holding increase to $16.22 billion in the third quarter from $10.67 billion in the quarter earlier. The number of funds long in this stock also went up to 145 from 116 quarter over quarter. D.E Shaw & Co. bought 4.279 million shares raising its stake in the stock to 1.33%. Aaron Cowen’s Suvretta Capital Management bought a new positino in Apple Inc. (NASDAQ:AAPL), with the latter now constituting 9.43% of the former’s portfolio. Third Point also initiated a new position in the company buying 2.5 million shares by the end of the third quarter valued at $282 million. The stock is up more than 5% year to date. The company has a trailing P/E of 13x which is lower than the broad market valuation and it also gives a healthy dividend yield of 2%. The company is entering new segments such as payments processing (Apple Pay) and electronics watches (Apple Watch). If a tax break is given by the Trump administration, Apple Inc. (NASDAQ:AAPL) may increase its dividends even further.

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