In this article, we discuss the 10 best diversified stocks to invest in.
Big corporations have been eagerly diversifying their portfolios over the past few years in order to shield themselves from the risks associated with a single market segment. There are companies that have crossed over $2 trillion in market capitalization while many others have grown to a valuation of hundreds of billions. Despite this consolidation, many of these large firms, most of them concentrated in the growth industry, have still yet to master stock volatility that has pummeled entire investment portfolios.
As growth stocks undergo yet another period of turmoil amid rumors of tighter regulation and inflation, the smart money seems to be flowing into the manufacturing and industrial conglomerates. It is hard to track the performance of conglomerates as a distinct branch within the business world. The Global Industry Classification Standard, established in 1999 by MSCI and Standard & Poor’s for use by the global financial community, lists 11 top-tier business sectors. These are subcategorized into 24 industry groups, 69 industries, and 158 sub-industries. However, conglomerates are not part of this classification system.
It is difficult for large conglomerates to succeed without strong leadership at the helm that can bring together a diverse group of businesses and make them tick as a single entity. This is why business leaders like Warren Buffett, Bill Gates, and Jeff Bezos – all of whom manage large, diversified companies – have gathered global admirers. Even in manufacturing hubs such as India, Japan, and China, diversified companies form an important part of the overall economy. Reliance Industries from India and the Softbank Group from Japan are prime examples.
The globalization of the world in the past decades and the digitization of the economy in recent months has resulted in the emergence of many conglomerates that have diversified across business lines. More than 20% of the benchmark S&P 500 is now made up of just five big technology conglomerates. Some of the best diversified stocks to buy right now include Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE: BRK-A), Danaher Corporation (NYSE: DHR), and General Electric Company (NYSE: GE), among others.
Consolidation in other sectors of the economy has also affected the finance world. The emergence of cryptocurrencies and fintech has disrupted markets worldwide. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 86 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 86 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Our Methodology
With this context in mind, here is our list of the 10 best diversified stocks to invest in. The main aim of this article is to acquaint readers with the biggest names in the conglomerates industry that are presently trading on markets in the United States. Only those firms that have multiple business lines and diverse portfolios were considered for the article.
The list is compiled according to the number of hedge fund holders in each company. Data from the 873 funds tracked by Insider Monkey was used for this purpose.
Special importance was assigned to the basic business fundamentals and analyst ratings for each firm to provide readers with some context so they can make more informed investment choices.
Best Diversified Stocks to Invest In
10. Icahn Enterprises L.P. (NASDAQ: IEP)
Number of Hedge Fund Holders: 4
Icahn Enterprises L.P. (NASDAQ: IEP) is placed tenth on our list of 10 best diversified stocks to invest in. The company has interests in the investment, energy, automotive, food packaging, metals, real estate, home fashion, and pharma sectors. It is headquartered in Florida.
In earnings results for the second quarter, posted on August 6, Icahn Enterprises L.P. (NASDAQ: IEP) reported a revenue of $3 billion, up more than 10% compared to the revenue over the same period last year and beating estimates by $990 million.
Out of the hedge funds being tracked by Insider Monkey, Florida-based investment firm Icahn Capital LP is a leading shareholder in Icahn Enterprises L.P. (NASDAQ: IEP) with 237 million shares worth more than $13 billion.
Just like Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE: BRK-B), Danaher Corporation (NYSE: DHR), and General Electric Company (NYSE: GE), Icahn Enterprises L.P. (NASDAQ: IEP) is also attracting investor interest in 2021.
9. Seaboard Corporation (NYSE: SEB)
Number of Hedge Fund Holders: 13
Seaboard Corporation (NYSE: SEB) is ranked ninth on our list of 10 best diversified stocks to invest in. The company operates in the agribusiness and transportation domains. It is headquartered in Kansas.
Seaboard Corporation (NYSE: SEB) reported earnings for the second quarter on August 3, posting earnings per share of $151.56 and a revenue of $2.4 billion, up 34% compared to the revenue over the same period last year.
At the end of the second quarter of 2021, 13 hedge funds in the database of Insider Monkey held stakes worth $129 million in Seaboard Corporation (NYSE: SEB), down from 14 in the previous quarter worth $125 million.
Along with Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE: BRK-B), Danaher Corporation (NYSE: DHR), and General Electric Company (NYSE: GE), Seaboard Corporation (NYSE: SEB) is also a solid investment in the conglomerate sector.
In its Q1 2021 investor letter, Third Avenue Management, an asset management firm, highlighted a few stocks and Seaboard Corporation (NYSE: SEB) was one of them. Here is what the fund said:
“The Fund’s compounder bucket includes companies such as Seaboard (conglomerate). We believe balance sheet strength and prudent capital allocation should allow these companies to compound NAV for many years to come. Financial services companies are roughly one third of the compounder category and are largely comprised of well-capitalized regional banks which make up 21% of the portfolio.”
8. Carlisle Companies Incorporated (NYSE: CSL)
Number of Hedge Fund Holders: 17
Carlisle Companies Incorporated (NYSE: CSL) is an Arizona-based company that operates as a diversified manufacturer of engineered products. It is placed eighth on our list of 10 best diversified stocks to invest in.
On August 18, investment advisory Loop Capital maintained a Buy rating on Carlisle Companies Incorporated (NYSE: CSL) stock and raised the price target to $245 from $215, noting there was greater confidence in the margin expansion potential of the company.
At the end of the second quarter of 2021, 17 hedge funds in the database of Insider Monkey held stakes worth $146 million in Carlisle Companies Incorporated (NYSE: CSL), down from 18 the preceding quarter worth $186 million.
In addition to Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE: BRK-B), Danaher Corporation (NYSE: DHR), and General Electric Company (NYSE: GE), Carlisle Companies Incorporated (NYSE: CSL) has also made a name for itself as a diversified company.
7. Crane Co. (NYSE: CR)
Number of Hedge Fund Holders: 25
Crane Co. (NYSE: CR) is a Connecticut-based firm that makes and sells engineered industrial products. It is ranked seventh on our list of 10 best diversified stocks to invest in.
On July 27, investment advisory DA Davidson reiterated a Buy rating on Crane Co. (NYSE: CR) stock and raised the price target to $115 from $110, underlining that the earnings beat of the firm in the second quarter was driven by strong organic sales.
At the end of the second quarter of 2021, 25 hedge funds in the database of Insider Monkey held stakes worth $303 million in Crane Co. (NYSE: CR), up from 17 in the previous quarter worth $277 million.
Amazon.com, Inc. (NASDAQ: AMZN), Berkshire Hathaway Inc. (NYSE: BRK-B), Danaher Corporation (NYSE: DHR), and General Electric Company (NYSE: GE) are some of the best diversified stocks to invest in, alongside Crane Co. (NYSE: CR).
6. 3M Company (NYSE: MMM)
Number of Hedge Fund Holders: 42
3M Company (NYSE: MMM) is placed sixth on our list of 10 best diversified stocks to invest in. The company has interests in the industrial, transportation, electronics, healthcare, and consumer products businesses. It is headquartered in Minnesota.
On July 28, investment advisory Argus kept a Buy rating on 3M Company (NYSE: MMM) stock and raised the price target to $225 from $220, noting that the earnings of the firm were poised to grow again after a period of inconsistency.
Out of the hedge funds being tracked by Insider Monkey, Washington-based firm Fisher Asset Management is a leading shareholder in 3M Company (NYSE: MMM) with 5.3 million shares worth more than $1 billion.
5. Honeywell International Inc. (NASDAQ: HON)
Number of Hedge Fund Holders: 57
Honeywell International Inc. (NASDAQ: HON) is ranked fifth on our list of 10 best diversified stocks to invest in. The company operates as a diversified technology and manufacturing firm. It is headquartered in North Carolina.
On July 26, investment advisory Deutsche Bank maintained a Buy rating on Honeywell International Inc. (NASDAQ: HON) stock and raised the price target to $251 from $245. Nicole DeBlase, an analyst at the firm, issued the ratings update.
At the end of the second quarter of 2021, 57 hedge funds in the database of Insider Monkey held stakes worth $1.8 billion in Honeywell International Inc. (NASDAQ: HON), up from 56 the preceding quarter worth $1.7 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Honeywell International Inc. (NASDAQ: HON) was one of them. Here is what the fund said:
“The portfolio’s quality bias and valuation discipline have generated compelling returns over time with typically strong relative results in more challenging environments as it did through the first three quarters of 2020. However, that same quality bias tends to create a more challenging relative performance environment for the Strategy during periods of sharp economic acceleration, which tend to benefit stocks that are more commodity linked or of lower quality. This has been the case during the vaccine- and stimulus-driven rally experienced late last year and during the most recent quarter. Sectors that lagged in the quarter included industrials, Honeywell also lagged in the quarter after previously generating strong returns over extended periods.”
4. General Electric Company (NYSE: GE)
Number of Hedge Fund Holders: 67
General Electric Company (NYSE: GE) is a Massachusetts-based industrial company that also has interests in the technology business. It is placed fourth on our list of 10 best diversified stocks to invest in.
On May 19, investment advisory Barclays reiterated an Overweight rating on General Electric Company (NYSE: GE) stocks and raised the price target to $16 from $15, noting the improvement in aviation data as a growth catalyst for the firm in the near-term.
At the end of the second quarter of 2021, 67 hedge funds in the database of Insider Monkey held stakes worth $6.08 billion in General Electric Company (NYSE: GE), down from 68 in the previous quarter worth $6.16 billion.
In its Q1 2021 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and General Electric Company (NYSE: GE) was one of them. Here is what the fund said:
“General Electric is outperforming our expectations for 2021 as the economic recovery is occurring faster than expected. We are particularly pleased with its free cash flow generation. We are happy to own it in our portfolio.”
3. Danaher Corporation (NYSE: DHR)
Number of Hedge Fund Holders: 78
Danaher Corporation (NYSE: DHR) is a Washington-based firm that markets professional, medical, industrial, and commercial products and services. It is ranked third on our list of 10 best diversified stocks to invest in.
On August 4, investment advisory Credit Suisse assumed coverage of Danaher Corporation (NYSE: DHR) stock with an Outperform rating and a price target of $306. Katie Tryhane, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 78 hedge funds in the database of Insider Monkey held stakes worth $6.4 billion in Danaher Corporation (NYSE: DHR), down from 81 in the previous quarter worth $5.7 billion.
In its Q2 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Danaher Corporation (NYSE: DHR) was one of them. Here is what the fund said:
“During the quarter the Fund’s largest holding Danaher made a notable acquisition, spending US$9bn (~5% of its market cap) to buy privately held Aldevron, a leading player in the fast growing field of genomic medicine. Over the years Danaher has built up a unique portfolio of life science and diagnostic assets. Their key life sciences businesses involve providing the tools and services to research, develop and manufacture biotech drugs. For example, they are a key provider to over 400 COVID vaccine and therapeutic projects globally.
Aldevron expands Danaher’s capability into gene therapy. Aldevron is a supplier of key ingredients for the next generation of therapies, namely cell and gene therapy and mRNA vaccines. Aldevron is the leader in these fields and this deal puts Danaher in pole position to participate in the wave of innovation occurring in this space.
The acquisition multiple is high – Danaher are paying US$9bn for what today is a US$500m revenue business but growing 30% a year with 40% operating margins, in our view justifying the high price. Importantly, management can see an investment return in line with recent acquisitions. As a reminder Danaher’s history and skill set is acquiring businesses, it is how the company has been successfully built over 35 years. The shares were up 4% on the news and have gained nearly 20% for the quarter. Most companies would be sold down off the back of an announcement like this but Danaher has a long multidecade track record of successful acquisitions and this fits a similar enough pattern.
The opportunity is to grow Aldevron into a multibillion dollar business given the growth in genomics and RNA innovation that’s occurring and as more of these types of therapeutics become approved. Overall as a key supplier with deep global networks across life sciences and medical research Danaher is very well placed to continue growing with the innovation in biotech and diagnostic markets. It remains an incredibly well run company and a high conviction investment in the Fund.”
2. Berkshire Hathaway Inc. (NYSE: BRK-B)
Number of Hedge Fund Holders: 116
Berkshire Hathaway Inc. (NYSE: BRK-B) is placed second on our list of 10 best diversified stocks to invest in. The company has interests in the insurance, freight rail transportation, and utility businesses. It operates from Nebraska.
On August 9, investment advisory UBS maintained a Buy rating on Berkshire Hathaway Inc. (NYSE: BRK-B) stock and raised the price target to $329 from $319, underlining that the earnings beat of the firm in the second quarter was driven by a cyclical rebound.
At the end of the second quarter of 2021, 116 hedge funds in the database of Insider Monkey held stakes worth $22.3 billion in Berkshire Hathaway Inc. (NYSE: BRK-B), up from 111 in the preceding quarter worth $19 billion.
In its Q1 2021 investor letter, Vltava Fund, an asset management firm, highlighted a few stocks and Berkshire Hathaway Inc. (NYSE: BRK-B) was one of them. Here is what the fund said:
“Despite the considerable rise in stock markets over the past year, there are still many attractive opportunities. Human nature also is playing a bit into our hands. Investor crowds often chase popular stocks, hot IPOs, or mysterious SPACs and completely leave aside stocks they consider boring and not sexy enough. A typical example of this category is our long-term largest position in Berkshire Hathaway. Since we bought it for the first time, its price has nearly quadrupled and yet it remains just as undervalued today as it was at that time. Considering the current rate at which it is buying back its own shares and the amount of cash that Berkshire Hathaway has, my greatest wish as a shareholder is for the company’s share price to remain as low as possible for as long as possible.”
1. Amazon.com, Inc. (NASDAQ: AMZN)
Number of Hedge Fund Holders: 271
Amazon.com, Inc. (NASDAQ: AMZN) is ranked first on our list of 10 best diversified stocks to invest in. The firm operates from Washington as a diversified technology firm with interests in other sectors like publishing and health.
On July 30, investment advisory Canaccord maintained a Buy rating on Amazon.com, Inc. (NASDAQ: AMZN) stock with a price target of $4,400, underlining that the firm will show robust revenue growth in the next two years.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Citadel Investment Group is a leading shareholder in Amazon.com, Inc. (NASDAQ: AMZN) with 3.8 million shares worth more than $13 billion.
In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:
“Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.
Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.
The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’
Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.
Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.
In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:
- Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.
- Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising,
Amazon Studios, Prime Video, Prime Music, M&A.
- Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce)
business.
- Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole
Foods.
Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.
We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”
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Disclosure. None. 10 Best Diversified Stocks to Invest In is originally published on Insider Monkey.
