In this piece, we will take a look at the 13 best quality stocks to buy now.
Investing in 2024 is significantly different from investing in the 1950s and onward. This is because these days investors have to. sift through thousands of stocks and countless data points and signals to separate the wheat from the chaff and make the right investment decisions. Amidst this hubris, the ability to pick out ‘quality’ stocks becomes important, and there’s quite a lot of financial literature available that helps determine what such stocks are.
Typically, stock analysis involves analyzing a firm’s financial statements to determine profitability, operating strengths, cost control, asset utilization, and other metrics. Some of these are also present in financial literature that discusses quality stocks. One such research paper comes courtesy of researchers associated with Research Affiliates. They point out that metrics that typically define a quality stock include earnings stability, capital structure, profitability, accounting practices, and investing strategies. Within these, the quality factors that were also related to returns were investment strategies, dividend payouts, profitability, and accounting strategies.
The next thing to ask is, whether quality stocks are any different from standard run of the mill stocks when it comes to share price performance. For context, the last 12 months on the stock market have been dominated by a few key themes. These are artificial intelligence, inflation, interest rates, and GDP growth. Higher rates and inflation are bearish stock indicators, while growth and AI have proven to have kept the market buoyant at a time when rates are at two decade high levels. So, over the past year, exchange traded funds that track quality stocks have appreciated by 12% to 27%, the midpoint of which is slightly lower than the S&P 500’s 23% price appreciation over the same time period. However, picking the right quality stocks appears to have its advantages as well, since the high end of the performance, i.e. 27%, is far higher than what the index has delivered.
ETFs and research aren’t the only ones that talk about quality stocks. One hedge fund that’s become quite well known for its focus on quality stocks is Cliff Asness’ AQR Capital Management. One of the largest hedge funds in the world, AQR had a 13F investment portfolio worth $58 billion as of Q1 2024 end according to Insider Monkey’s research. Close to a quarter of its portfolio is invested in the technology industry, and the second biggest category is services stocks. AQR focuses on stocks that follow its strategy of Quality Minus Junk or QMJ. According to its founder Cliff Asness, a quality stock is defined by its shareholder payouts, growth, profitability, and sound financial and general management. We recently took a look at some top AQR Capital management stocks and you can check them out by looking at 13 Best Stocks To Buy Now According To Billionaire Cliff Asness.
Before we head to our list of the best quality stocks, a general overview of the stock market is relevant. Right now, investors are wondering when the first interest rate cuts might occur. The latest bit on this front came in the form of the Personal Consumption Expenditure (PCE) data from the Commerce Department. This data set revealed that the 12 month inflation in the US stood at 2.7% in April 2024, which was still higher than the Fed’s preferred rate of 2%. Additionally, the data also provided investors with some bearish signals. These were apparent in the readings for consumer spending, which slowed down to 2% in the first quarter of 2024 over the robust 3.3% reading in Q4 2023.
Lower spending means less money sloshing in the economy, and while this might help reduce prices, it can also affect business performance, economic growth, and naturally, stock market performance. Data from the CME Fed Watch Tool shows that 47% of all investors polled expect a 25 basis point rate cut in September, while an additional 7.5% believe that the Fed might get generous and cut rates by as much as 50 basis points.
With these details in mind, let’s take a look at some top quality stocks that hedge funds are buying.
A money manager at a desk crowded with financial reports and data screens.
Our Methodology
To make our list of the best quality stocks to buy, we ranked the 30 largest constituents of a quality stock ETF and picked out those with the highest number of hedge fund investors in Q1 2024.
By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
13. Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Shareholders In Q1 2024: 79
Applied Materials, Inc. (NASDAQ:AMAT) is a semiconductor manufacturing equipment firm headquartered in Santa Clara, California. The firm’s shares are up by a strong 59% over the past twelve months since it is a key player in the chip industry that is seeing AI related tailwinds. On the earnings front, adjusted EPS has beaten analyst estimates in all four latest quarters, and Applied Materials, Inc. (NASDAQ:AMAT) is a dividend paying stock with a 40 cent quarterly dividend and a 0.74% yield.
As of Q1 2024, 79 hedge funds part of Insider Monkey’s database were Applied Materials, Inc. (NASDAQ:AMAT)’s stakeholders. David Blood and Al Gore’s Generation Investment Management held the largest stake which was worth $1 billion.
Applied Materials, Inc. (NASDAQ:AMAT)’s valuation is more down to earth though since its forward P/E ratio is 25.77 which is slightly higher than the S&P 500’s 21. Its revenue has grown by 54% over the past four years, and the stock has appreciated by 251% during the same time period as investors target its potential to utilize AI demand. Recently AMAT made our list of the 10 Best Performing Dividend Stocks in 2024. Here is what we said about the stock:
“In its fiscal Q2 2024, Applied Materials, Inc. (NASDAQ:AMAT) reported revenue of $6.6 billion, which remained unchanged from the same period last year. However, the revenue beat analysts’ estimates by $110 million. Its net income for the period jumped by 9% year-over-year to $1.7 billion.
Examining the company’s cash position in relation to its dividend strategy revealed that it holds a sufficient amount of cash on its balance sheet. In the most recent quarter, Applied Materials, Inc. (NASDAQ:AMAT) generated nearly $1.4 billion in operating cash flow and its free cash flow came in at over $1.1 billion. During the quarter, the company returned $1.09 billion to shareholders, including $266 million in dividends. In addition to this, Applied Materials, Inc. (NASDAQ:AMAT) ended the quarter with over $7 billion available in cash and cash equivalents.”
We aren’t too bullish on AMAT right now because of the legal risks it is facing. The US Department of Commerce is continuing its investigation into Applied Materials Inc.’s shipments to Chinese customers to enforce strict trade restrictions aimed at preventing China from acquiring advanced chipmaking capabilities, which the US views as a national security threat. Applied Materials disclosed that it received subpoenas in May from the Commerce Department’s Bureau of Industry and Security, following earlier subpoenas in November. The company is cooperating fully but acknowledges uncertainties about the investigation’s outcome or potential penalties. Additionally, Applied Materials has faced inquiries from the US Attorney’s Office for the District of Massachusetts since 2022 and the SEC earlier this year. As the largest US maker of chip-manufacturing equipment, Applied Materials was significantly impacted by the initial export restrictions but continues to rely on China, which accounts for about a quarter of its revenue, with Chinese businesses increasingly investing in older chipmaking equipment.
12. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Shareholders In Q1 2024: 80
Johnson & Johnson (NYSE:JNJ), the consumer goods and personal health firm, ended May 2024 on a strong note as it completed the acquisition of a medical devices manufacturer. This expands the firm’s market and enables it to grow revenue by targeting new markets. The average of 23 one year analyst share price targets for the firm is $172.16, and the average share rating is Buy.
During 2024’s first quarter, 80 hedge funds out of the 919 profiled by Insider Monkey had bought stakes in Johnson & Johnson (NYSE:JNJ). One fund with a valuable stake was Ken Fisher’s Fisher Asset Management. It held 6.6 million shares that were worth $1 billion.
Johnson & Johnson (NYSE:JNJ)’s shares have returned 160% over the past decade, lower than the S&P 500’s 212%. This casts doubts on whether it can outperform the broader market, and a forward P/E ratio of 13.79 makes it undervalued compared to the broader market. However, the firm does have more than forty new products in late stage clinical trials that could inject life into the shares.
Johnson & Johnson decided to spin off its consumer health business to create two more focused and agile entities. Kenvue Inc (KVUE) is designed to concentrate on consumer health products, including well-known brands like Tylenol, Band-Aid, Listerine, and Neutrogena, while Johnson & Johnson focuses on its pharmaceutical and medical device businesses. Here is what Oakmark Funds said about Kenvue recently:
“Kenvue Inc. (NYSE:KVUE) became the largest standalone consumer health company following its split-off from Johnson & Johnson in May 2023. The company’s highly recognizable brands, such as Neutrogena, Listerine, Tylenol and Band-Aid, have been market share leaders in their respective categories for generations. However, Kenvue’s first year as a public company was clouded by litigation and market share losses in certain categories. As a result, Kenvue now trades for just 16.5x trailing earnings, a substantial discount to the market and other consumer health and packaged goods companies. We see an opportunity for the company to improve efficiency and re-invest the cost savings into increased product development and marketing, which should help improve its growth and brand equity.”
One factor that recently depressed the stock price of JNJ is legal risks. Johnson & Johnson is advancing a $6.475 billion proposed settlement to resolve tens of thousands of lawsuits alleging that its talc products, including baby powder, contain asbestos and cause ovarian cancer. The settlement will be handled through a third bankruptcy filing of a subsidiary, LTL Management, aiming to end all current and future ovarian cancer claims, which represent 99% of the talc-related lawsuits. Previous efforts to settle these claims via bankruptcy were rejected by courts. J&J asserts that its products are safe and has garnered support from the majority of plaintiffs’ attorneys. The settlement requires 75% support to be finalized and would prevent further litigation. This deal builds on prior settlements related to mesothelioma and state consumer protection actions, with J&J having already incurred significant costs for talc-related settlements. We don’t think JNJ shares will start delivering satisfactory returns until this legal cloud over the company goes away.
11. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Shareholders In Q1 2024: 104
Health benefits provider UnitedHealth Group Incorporated (NYSE:UNH)’s average share price target of 23 one year analyst estimates is $569.78 and the average rating is Strong Buy. On May 15, Bank of America Securities analyst Kevin Fischbeck reaffirmed his Buy rating on UnitedHealth Group Incorporated (NYSE:UNH) with a price target of $675.00. He highlighted several factors for this rating, including the company’s initiatives to achieve long-term EPS growth of 13-16%, its robust value-based care model, and its adaptable business strategy. Fischbeck emphasized the company’s effective cost management and ability to maintain target margins. He anticipates continued growth for UnitedHealth Group with stable margins, driven by disciplined pricing and sustainable benefit design.
The firm’s shares dropped by 6% and led the insurance sector in late May 2024 when it shared that state insurance reimbursements could drop due to a pandemic era policy ending.
As of Q1 2024, 104 hedge funds covered by Insider Monkey’s research had held a stake in UnitedHealth Group Incorporated (NYSE:UNH). Ken Fisher’s Fisher Asset Management was the largest stakeholder due to its $1.4 billion stake.
Like other established firms, UnitedHealth Group Incorporated (NYSE:UNH)’s forward P/E of 17 makes it undervalued compared to the market. Additionally, while its revenue has grown by 44% over the past four years, the shares are up by 71%, leaving them vulnerable to downward shifts. Baron Health Care Fund is long-term bullish on UNH shares, thinking that the company’s stock price can deliver around 15% annual returns:
“UnitedHealth Group Incorporated (NYSE:UNH) is a leading health insurance company that operates across four segments: United Healthcare, Optum Health, OptumInsight, and OptumRX. Shares fell alongside other managed care organizations (MCOs) due to patient utilization of Medicare Advantage (MA) that was higher than consensus forecasts, raising concerns that MCOs had mispriced 2024 bids and could suffer margin compression as a result. In addition, the industry is facing headwinds from MA reimbursement cuts and Star Rating changes. While management said higher cost trends are mostly transitory and reflected in its bidding, and 2024 guidance was roughly in line with consensus, investors took a more cautious wait-and-see approach. We believe UnitedHealth should remain a core portfolio holding, as it is a way to play positive demographic, population health, and value-based reimbursement trends. Despite its size, we think the company should be able to grow earnings consistent with its 13% to 16% long-term EPS annual target, the fastest among major MCOs.”
10. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Shareholders In Q1 2024: 107
Netflix, Inc. (NASDAQ:NFLX), the global streaming giant, has beaten analyst adjusted EPS estimates in three out of its four latest quarters. These include Netflix, Inc. (NASDAQ:NFLX)’s latest quarter, which saw the firm report $9.37 billion in revenue and $5.28 in adjusted EPS. These beat analyst estimates of $9.28 billion for revenue and $4.52 for EPS.
For their first quarter of 2024 investment stakes, 107 hedge funds part of Insider Monkey’s database had bought stakes in Netflix, Inc. (NASDAQ:NFLX). Ken Fisher’s Fisher Asset Management held the largest stake which was worth $2.5 billion.
Fund Ensemble Capital Management commented on Netflix, Inc. (NASDAQ:NFLX)’s quarterly performance in its Q1 2024 investor letter as it aimed at the bears and shared:
The rapid recovery of Netflix’s subscriber growth has shocked investors who drove the stock down to a price of just $166 in May 2022. While at the time, bearish investors were declaring the company’s growth days were behind it, instead the company added a remarkable 13.1 million new subscribers in the most recent quarter. This was the single largest quarterly subscriber addition other than the large gains experienced during the first quarter of COVID. For all of 2023, the company added nearly 30 million new subscribers, making it the largest annual gain in Netflix history other than the first year of COVID.
The tail end of May also saw some action for Netflix, Inc. (NASDAQ:NFLX)’s shares on the analyst front. It received a $50 share price target boost from Evercore, which set a $700 share price target. In the coverage, the firm kept an Overweight rating for the shares, citing a high potential for earnings per share in 2025. Evercore analyst Mark Mahaney shared that he was confident in Netflix, Inc. (NASDAQ:NFLX)’s financial statement fundamentals and the potential for the video live streaming company to successfully phase out its Basic Plan. Netflix, Inc. (NASDAQ:NFLX) had started out 2024 by announcing the decision in its Q4 2023 shareholder letter, after revealing earlier during the year that new subscribers to the platform would be unable to sign up to the lowest subscription tier. The analyst believes that Netflix, Inc. (NASDAQ:NFLX) also stands to benefit from expanding revenue streams to include additional markets such as livestreaming video games.