We recently compiled a list of the 7 Best Big Company Stocks to Buy Now. In this article, we are going to take a look at where Alphabet Inc. (NASDAQ:GOOGL) stands against the other big company stocks.
Mega-cap stocks—major technology companies to be precise—continued to drive a disproportionate share of the total US stock market returns. Market experts believe that from 2023 beginning to May 2024 end, only a handful of the biggest and most well-established technology companies drove ~60% of the S&P 500’s 40%+ gain.
FactSet reported that, for 2Q 2024 (with 93% of S&P 500 companies publishing actual results), ~79% of the S&P 500 companies reported positive EPS surprises. On the other hand, ~60% of S&P 500 companies reported positive revenue surprises. In 2Q 2024, semiconductor companies’ stocks were the critical drivers for the S&P 500 Index. The AI themes supported other sectors, like utilities, seeking support from higher electricity demand for AI data centers.
3Q 2024 Earnings Season – A Preview
Wall Street experts believe that estimates for 3Q 2024 have seen a decline and the magnitude of estimate cuts seems to be significantly bigger than compared to the comparable periods of the first 2 quarters of 2024. Market participants opine that total S&P 500 earnings should see an increase of 3.9% from the same period of last year on 4.7% revenue growth. These estimates have come down since the beginning of the period, as the current 3.9% growth had fallen from 6.9% at the beginning of July.
The decline in estimates stems from the risks associated with economic downside, slower disinflation, expectations for higher-for-longer rates, and increased geopolitical risks. Apart from these risks, the uncertainty around the US Presidential elections remains the most important factor responsible for the decline in estimates.
Wall Street analysts believe that uncertainty surrounding the US presidential election is expected to rise as the November vote draws closer. This can act as an additional headwind in the environment already demonstrating signs of losing momentum.
Reuters reported that populism, polarization, and an expected tight race can result in a surge in the economic policy uncertainty index (EPU). This is a news-headline-based index, which was created by economics professors Steven J. Davis, Scott R. Baker, and Nick Bloom. The rise in EPU takes place when an uncertain outlook about government policy prompts consumers to delay their spending and forces businesses to put a halt on investment and hiring.
Brandywine Global Investment Management (A Franklin Templeton Company), an investment management firm, believes that this might be happening in the current environment. The firm noted that the University of Michigan’s current economic conditions index remains below the expectations index. Notably, this is a rare occurrence, suggesting that consumers are anxious.
Amidst Worries, Investors Should Stick to Big Company Stocks
Analysts at Brandywine Global believe that this year’s election cycle, whether warranted or not, continues to impact the US consumer, which in turn, is impacting the corporate sector.
In the 2020 follow-up working paper, Davis (the co-founder of the EPU index) and his colleagues revealed that the EPU index tends to increase by ~18% in the month of November during a Presidential election. When elections come close, and there is a winning margin of less than 5%, and polarized, the EPU index can jump by ~28% in election month.
Political uncertainty can be a more powerful factor in asset prices, with investors focusing on the US Presidential elections. A JPMorgan survey revealed that investors continue to see political risk in the US and abroad as the top destabilizing metric for equities.
AI fever coupled with strong earnings has supported broader equities in 1H 2024, and gains have been concentrated in technology and growth stocks. Analysts opine that some investors are still looking for areas of the market that have underperformed, and they expect that the recent rally in tech might spread into other sectors as well. Most investors welcomed the signs of a slowdown in inflation and moderation in growth. As a result, the US Fed has hinted to cut key interest rates. With uncertainties looming, market experts believe that investors should stick to the big stocks, which have a healthy track record of delivering strong gains.
Our methodology
To select the 7 Best Big Company Stocks to Buy Now, we used the Yahoo Finance and Finviz stock screeners to filter stocks with biggest market caps from different industries. Next, we narrowed our list by selecting the big and well-established companies that were the most popular among elite hedge funds. Finally, the stocks were ranked in the ascending order of their hedge fund sentiment.
Why are we interested in the stocks that hedge funds pile into? 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).
A user’s hands typing a search query into a Google Search box, emphasizing the company’s search capabilities.
Alphabet Inc. (NASDAQ:GOOGL)
Number of hedge fund holders: 216
Alphabet Inc. (NASDAQ:GOOGL) is a holding company and the internet media giant, Google, is its wholly-owned subsidiary.
The company enjoys durable competitive advantages associated with intangible assets and its network effect. Alphabet Inc. (NASDAQ:GOOGL)’s technological expertise associated with algorithms and AI, together with access to and accumulation of valuable data for advertisers should act as tailwinds. Next, its search engine is well-regarded and appreciated across the industry players. YouTube is expected to benefit from robust reach and usage frequency. Its video-only content format continues to be appealing to brand advertisers, which should support Alphabet Inc. (NASDAQ:GOOGL) over the next decade.
Wall Street analysts believe that the market underappreciates Alphabet Inc. (NASDAQ:GOOGL)’s exposure to AI, given the fact that its Gemini model continues to be integrated into search results, YouTube advertising, and its cloud offerings. As we all know, cloud players are expected to be the AI winners over the long-term, and Alphabet Inc. (NASDAQ:GOOGL) is well-positioned to take advantage.
Alphabet Inc. (NASDAQ:GOOGL) released its 2Q 2024 results, with the performance supported by ongoing strength in Search and momentum in Cloud. The company’s longstanding infrastructure leadership, coupled with in-house research teams, should help the tech giant to pursue opportunities ahead.
Analysts at TD Cowen initiated coverage on the shares of Alphabet Inc. (NASDAQ:GOOGL), increasing its price target from $200.00 to $220.00. They gave a “Buy” rating on 10th July.
Patient Capital Management, a value investing firm, released its second quarter 2024 investor letter. Here is what the fund said:
“Alphabet Inc. (NASDAQ:GOOGL) was a top contributor in the second quarter, finally catching up to its peers in the Magnificent 7. The company gained 20.8% in the period following strong first quarter earnings, a new $70B repurchase program (3% of shares outstanding) and the initiation of a cash dividend ($0.20 per share; 0.42% yield). We continue to believe the market underappreciates Google’s exposure to AI with its Gemini model being integrated into search results, YouTube advertising and its cloud offering. We continue to think that the cloud players will be the AI winners in the long-term, with Google being well positioned to take advantage. While the company trades at 24x 2024 earnings, if you remove the money-losing and under-earning businesses, you realize that you are paying below a market multiple for the core Google business. We do not believe there are many other AI winners trading at such an attractive multiple.”
Overall GOOGL ranks 3rd on our list of the best big company stocks to buy. While we acknowledge the potential of GOOGL as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than GOOGL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.