In this article, we discuss the 10 stocks getting the attention of elite hedge funds.
Hedge funds have not performed well in the past decade. In fact, hedge funds have been more a part of conversations around investing in relation to diversification as opposed to returns. However, this may be changing. In 2020, amid one of the most largest stock sell-offs in market history, the assets under management for hedge funds reached a record high of $3.6 trillion. According to investment bank Barclays, this was a result of performance since the outflows from the first half of the year were not offset by inflows in the second half.
In a report titled 2021 Global Hedge Fund Industry Outlook and Trends, based on survey data collected from 240 investors who had $725 billion in hedge funds, Barclays claimed that hedge funds were likely to attract $30 billion from investors this year. This would mark the first annual net inflow for hedge funds since 2017. Barclays also identified some popular hedge fund strategies in the report that included sector-specific equity managers, market-neutral stock-pickers and discretionary macro funds.
Some of the stocks presently getting attention from the elite hedge funds include Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD), among others. As hedge funds brace for more investments – more than 40% respondents to a Barclays survey said they would boost investments in hedge funds this year – investors should be wary of a focus on diversity and alternative investments as possible disruptors in the investing arena.
Pixabay/Public Domain
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 124 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 115 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
The main aim of this article is to acquaint readers with the companies that have generated significant investments from elite hedge funds in the past few months.
The firms were selected using data from the 873 funds tracked by Insider Monkey. Only those that saw an increase in the number of hedge fund holders by 15 in the second quarter, as compared to the first quarter of 2021, were picked. The list is compiled according to the number of hedge fund holders in each stock.
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.
Stocks Getting Attention of Elite Hedge Funds
10. Clarivate Plc (NYSE: CLVT)
Number of Hedge Fund Holders: 41
Clarivate Plc (NYSE: CLVT) is placed tenth on our list of 10 stocks getting the attention of elite hedge funds. The firm markets analytics and information systems services. It is headquartered in the United Kingdom.
On August 16, investment advisory Bank of America initiated coverage of Clarivate Plc (NYSE: CLVT) stock with a Buy rating and a price target of $28, noting the firm had “quality data assets and a predictable business model”.
At the end of the second quarter of 2021, 41 hedge funds in the database of Insider Monkey held stakes worth $5.3 billion in Clarivate Plc (NYSE: CLVT), up from 26 the preceding quarter worth $4.7 billion.
Just like Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD), Clarivate Plc (NYSE: CLVT) is one of the stocks attracting hedge fund interest.
In its Q4 2020 investor letter, Madison Funds, an asset management firm, highlighted a few stocks and Clarivate Plc (NYSE: CLVT) was one of them. Here is what the fund said:
“Clarivate is a leading provider of various data and analytics for scientific, pharmaceutical, and intellectual property markets, with several different subsidiaries assembled through acquisitions. Among university academics, its Web of Science product is a household name as a deep and broad database covering academic studies published dating back to the 19th century. It’s the de facto standard of reference for a scientist or student looking for what’s been published in the past. Clarivate’s Derwent unit is similar to Web of Science, but for patent filings. Its database contains 98% of all patents filed globally, and is the reference standard used by law firms, corporations, and governments to research patents. Its most recent acquisition, CPA Global, is a leading provider of software that helps companies and law firms manage and process their portfolio of patents and trademarks.
Clarivate’s products are very sticky with high margins. Over 80% of its revenues are in subscription form, and the relatively mission critical nature of its products gives it very high customer retention and good pricing power. As you might imagine, the shares in such a company do not come cheap. However, we believe it’s cheaper than it looks. It has good organic growth potential, but also can continue to be a platform for further acquisitions. The ace in the hole here is Chairman and CEO Jerre Stead. If that name sounds familiar, that’s because it should. Stead was the entrepreneur and executive who built IHS into the information services powerhouse company that we invested in some years ago. He retired soon after selling IHS to Markit in 2016, but it turns out he didn’t really retire. He decided to take what he learned at IHS and apply it to a new set of information service businesses. Clarivate is the result. As investors in IHS, we benefitted from the success of Jerre 2.0, when he returned from his first retirement with renewed energy when his successor didn’t pan out. With Clarivate, we have Jerre version 3.0, and we hope that it’s another upgrade once again.”
9. Welbilt, Inc. (NYSE: WBT)
Number of Hedge Fund Holders: 44
Welbilt, Inc. (NYSE: WBT) is ranked ninth on our list of 10 stocks getting the attention of elite hedge funds. The firm makes and sells food service equipment for commercial purposes and operates from Florida.
In earnings results for the second quarter, posted on August 3, Welbilt, Inc. (NYSE: WBT) reported earnings per share of $0.22, beating estimates by $0.09. The revenue over the period was close to $400 million, up 92% year-on -year.
Out of the hedge funds being tracked by Insider Monkey, Florida-based investment firm Icahn Capital LP is a leading shareholder in Welbilt, Inc. (NYSE: WBT) with 11 million shares worth more than $258 million.
In addition to Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD), Welbilt, Inc. (NYSE: WBT) is one of the stocks on the hedge fund radar.
8. Dun & Bradstreet Holdings, Inc. (NYSE: DNB)
Number of Hedge Fund Holders: 45
Dun & Bradstreet Holdings, Inc. (NYSE: DNB) is a New Jersey-based business data and analytics firm. It is placed eighth on our list of 10 stocks getting the attention of elite hedge funds.
On July 7, investment advisory RBC Capital assumed coverage of Dun & Bradstreet Holdings, Inc. (NYSE: DNB) stock with an Outperform rating and a price target of $30, noting the recent pullback in the share price was a buying opportunity.
At the end of the second quarter of 2021, 45 hedge funds in the database of Insider Monkey held stakes worth $869 million in Dun & Bradstreet Holdings, Inc. (NYSE: DNB), up from 29 in the previous quarter worth $835 million.
Along with Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD), Dun & Bradstreet Holdings, Inc. (NYSE: DNB) has also attracted attention from top hedge funds.
In its Q1 2021 investor letter, Weitz Investment Management, an asset management firm, highlighted a few stocks and Dun & Bradstreet Holdings, Inc. (NYSE: DNB) was one of them. Here is what the fund said:
“Dun & Bradstreet collects and provides proprietary data used by businesses to understand the credit risk of their counterparties. Under the management of its Chairman Bill Foley and CEO Anthony Jabbour, who both joined the company in 2019, Dun & Bradstreet has moved to modernize its technology, improve its sales and contracting practices, invest in new data and capabilities to enhance its value to customers, and evaluate potential acquisitions to boost each of these efforts.”
7. Proofpoint, Inc. (NASDAQ: PFPT)
Number of Hedge Fund Holders: 48
Proofpoint, Inc. (NASDAQ: PFPT) is a California-based security services provider. It is ranked seventh on our list of 10 stocks getting the attention of elite hedge funds.
In earnings results for the second quarter, posted on July 29, Proofpoint, Inc. (NASDAQ: PFPT) reported earnings per share of $0.63, beating expectations by $0.15. The revenue over the period was $308 million, up 31% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, Naples-based investment firm Pentwater Capital Management is a leading shareholder in Proofpoint, Inc. (NASDAQ: PFPT) with 2.5 million shares worth more than $437 million.
Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD) are on the list of stocks getting a lot of interest from hedge funds, alongside Proofpoint, Inc. (NASDAQ: PFPT).
6. Marvell Technology, Inc. (NASDAQ: MRVL)
Number of Hedge Fund Holders: 51
Marvell Technology, Inc. (NASDAQ: MRVL) is placed sixth on our list of 10 stocks getting the attention of elite hedge funds. The company makes and sells semiconductors and related products. It is headquartered in Delaware.
On August 27, investment advisory Citi maintained a Buy rating on Marvell Technology, Inc. (NASDAQ: MRVL) stock and raised the price target to $70 from $64, identifying the firm as a “multi-year data centre growth story”.
At the end of the second quarter of 2021, 51 hedge funds in the database of Insider Monkey held stakes worth $1.3 billion in Marvell Technology, Inc. (NASDAQ: MRVL), up from 33 in the previous quarter worth $683 million.
Amazon.com, Inc. (NASDAQ: AMZN), UnitedHealth Group Incorporated (NYSE: UNH), Nuance Communications, Inc. (NASDAQ: NUAN), and Lithia Motors, Inc. (NYSE: LAD) are some of the best stocks that hedge funds recommend, just like Marvell Technology, Inc. (NASDAQ: MRVL).
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Marvell Technology, Inc. (NASDAQ: MRVL) was one of them. Here is what the fund said:
“We also purchased Marvell Technology Group, in the IT sector, a semiconductor maker with exposure to the fast growing 5G and data center markets whose shares sold off in the latest rotation out of growth stocks. Marvell just acquired data center supplier Inphi, a name we have held in other ClearBridge portfolios, which should increase the chipmaker’s cross-selling opportunities in a strong demand environment for chips.”
5. XPO Logistics, Inc. (NYSE: XPO)
Number of Hedge Fund Holders: 57
XPO Logistics, Inc. (NYSE: XPO) is ranked fifth on our list of 10 stocks getting the attention of elite hedge funds. The firm provides supply chain solutions and operates from Connecticut.
On August 12, investment advisory Morgan Stanley initiated coverage of XPO Logistics, Inc. (NYSE: XPO) stock with an Equal Weight rating and a price target of $75, noting it may be a while before the market realizes the true value of the company.
Out of the hedge funds being tracked by Insider Monkey, Bermuda-based investment firm Orbis Investment Management is a leading shareholder in XPO Logistics, Inc. (NYSE: XPO) with 11 million shares worth more than $1.5 billion.
In its Q4 2020 investor letter, Adestella Investment Management, an asset management firm, highlighted a few stocks and XPO Logistics, Inc. (NYSE: XPO) was one of them. Here is what the fund said:
“XPO Logistics (XPO) – the XPO thesis was very simple, but it proved very successful. As the stock irrationally sold off in the spring and made only a tepid recovery in the following months, we were able to buy into a well-operated business with plenty of growth drivers at a compelling price. Sentiment surrounding the company improved thanks to a strong earnings, the resumption of asset sale plans that had been shelved in the spring, and the announcement of a spinoff to unlock the SOTP value. As the stock approached our estimate of a $115 fair value, we exited with more than a clean double from our cost basis.”
4. Lithia Motors, Inc. (NYSE: LAD)
Number of Hedge Fund Holders: 63
Lithia Motors, Inc. (NYSE: LAD) is an Oregon-based automotive retailer. It is placed fourth on our list of 10 stocks getting the attention of elite hedge funds.
On July 22, investment advisory Craig-Hallum maintained a Buy rating on Lithia Motors, Inc. (NYSE: LAD) stock and raised the price target to $520 from $500, underlining that the firm beat every metric in the recently released quarterly earnings report.
At the end of the second quarter of 2021, 63 hedge funds in the database of Insider Monkey held stakes worth $2.9 billion in Lithia Motors, Inc. (NYSE: LAD), up from 40 in the preceding quarter worth $2.3 billion.
3. Nuance Communications, Inc. (NASDAQ: NUAN)
Number of Hedge Fund Holders: 72
Nuance Communications, Inc. (NASDAQ: NUAN) is a Massachusetts-based firm that markets artificial intelligence solutions. It is ranked third on our list of 10 stocks getting the attention of elite hedge funds.
In earnings results for the third fiscal quarter, posted on August 6, Nuance Communications, Inc. (NASDAQ: NUAN) reported earnings per share of $0.16, missing market expectations by $0.01. The revenue over the period was $336 million, beating estimates by more than $2 million.
Out of the hedge funds being tracked by Insider Monkey, New York-based firm Coatue Management is a leading shareholder in Nuance Communications, Inc. (NASDAQ: NUAN) with 13 million shares worth more than $732 million.
In its Q2 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Nuance Communications, Inc. (NASDAQ: NUAN) was one of them. Here is what the fund said:
“In general, improving growth companies are taking specific actions to enhance their growth profiles going forward, whether through a restructuring, business model change, new management team or more productive use of assets. Another recent example is Nuance Communications, which was simplified and reorganized under new leadership in 2018 and subsequently acquired by Microsoft for a significant premium this quarter. This continues the Strategy’s long track record of positioning successfully to benefit from consolidation, with more than 80 companies having been acquired since inception.”
2. UnitedHealth Group Incorporated (NYSE: UNH)
Number of Hedge Fund Holders: 105
UnitedHealth Group Incorporated (NYSE: UNH) is placed second on our list of 10 stocks getting the attention of elite hedge funds. The firm operates as a diversified healthcare firm. It is headquartered in Minnesota.
On July 16, investment advisory Stephens reiterated an Overweight rating on UnitedHealth Group Incorporated (NYSE: UNH) stock and raised the price target to $460 from $440, appreciating the solid earnings reported by the firm for the second quarter of 2021.
At the end of the second quarter of 2021, 105 hedge funds in the database of Insider Monkey held stakes worth $13 billion in UnitedHealth Group Incorporated (NYSE: UNH), up from 89 in the preceding quarter worth $12 billion.
In its Q2 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and UnitedHealth Group Incorporated (NYSE: UNH) was one of them. Here is what the fund said:
“A good way to conceptualize how we think about portfolio construction is to picture a pyramid. At the bottom of the pyramid are the durable compounding growth companies that form the strong foundation, resilience and consistency for the Strategy. We think these companies should comprise just under half of portfolio assets and feature annual revenue growth rates ranging from two times GDP up to 20% as well as healthy free cash flow generation.
UnitedHealth Group, a name we have owned in the Strategy since 1992, is a good example of a long-term compounder, having grown its revenue base from approximately $600 million to north of $260 billion over that time frame. It remains constantly focused on investing in new growth drivers such as telemedicine and health care analytics. Broadcom and Comcast have delivered similar long-term appreciation through a combination of organic growth, capital deployment into new and adjacent opportunities through merger and acquisition activity as well as returning capital to shareholders through buybacks and dividends.”
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 stocks getting the attention of elite hedge funds. The firm operates as a diversified technology corporation and is headquartered in Washington.
On July 30, investment advisory Stifel maintained a Buy rating on Amazon.com, Inc. (NASDAQ: AMZN) stock with a price target of $4,400, noting that investors should buy the stock amid a short-term pullback in share price on the back of a revenue miss in the second quarter earnings.
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 Stocks Getting Attention of Elite Hedge Funds is originally published on Insider Monkey.
