Last week, Goldman Sachs released its quarterly VIP list, showcasing the top 50 stocks that appear most frequently as top-10 holdings among hedge funds. The activity from these fund is quite interesting, and has left numerous trends that could indicate future performance.
A Look At The Top 20
Goldman’s VIP list offers one of the market’s best, most extensive arrays of hedge fund information.
In the report, Goldman states that the average hedge fund has returned gains of 5% YTD, as of May 5, 2013. This compares poorly with the S&P 500’s return of 15% during that same period.
However, for the VIP’s top 20, it is a different story; they have returned a gain of 25% during the same period. You can see those top 20 below; they’re compared against their year-ago counterparts so that we can see how hedge funds have changed their ownership ofcertain stocks.
| Q1 2012 | Q1 2013 | |
|---|---|---|
| 1. | Apple Inc. | American International Group (NYSE:AIG) |
| 2. | ||
| 3. | Express Scripts | Apple Inc. |
| 4. | Microsoft (NASDAQ:MSFT) | Citigroup (NYSE:C) |
| 5. | Qualcomm | General Motors |
| 6. | Citigroup | Priceline |
| 7. | General Motors | Virgin Media |
| 8. | Priceline | News Corp |
| 9. | JPMorgan | Microsoft |
| 10. | Liberty Media | Hertz |
| 11. | Delphi Automotive | JPMorgan |
| 12. | BP | Anadarko Petroleum |
| 13. | Pfizer | Pfizer |
| 14. | Tyco | Qualcomm |
| 15. | Visa | Charter Communications |
| 16. | Yahoo! | Hess |
| 17. | LyondellBasell | CBS |
| 18. | Anadarko Petroleum | eBay |
| 19. | Bank of America | Delta Airlines |
| 20. | Ford Motor | Equinix |
The Emergence of AIG
Apple Inc. (NASDAQ:AAPL) held the top spot on this list for three years, until Q4 2012. Since then, American International Group Inc (NYSE:AIG) has come “back from the dead” with authority. In the year prior, AIG wasn’t even in the top 20 – but now it rests atop the list, where it has stayed for two consecutive quarters.
During the last year, American International Group Inc (NYSE:AIG) has rallied to post gains of 60%. While some might think the stock is now expensive, I still like AIG. Trading at just 65% of its book value per share — the stock’s worth if it liquidated all assets and
paid all debts — the company offers investors a measure of safety.
In addition, American International Group Inc (NYSE:AIG)’s underwriting business has improved, and the company has stated its plan to reduce total share count by 30% in the next two years. Given all that, I am not surprised that hedge funds are rushing to buy American International Group Inc (NYSE:AIG), and I’d expect to see it trade considerably higher.
This Tech Stock’s Rank Falls, But Its Shares Rise
Thus, Microsoft Corporation (NASDAQ:MSFT)’s 28% YTD gains have not come from hedge funds, insider buying, or the inclusion to new indexes — but rather the only remaining investment group: retail investors.
With the company’s new Xbox gaming console release and new products set to arrive later this year, it will be interesting to watch Microsoft Corporation (NASDAQ:MSFT) to see whether hedge funds begin to buy this stock. Judging by its current ranking, there is a lot of potential hedge fund money on the table. If in fact hedge funds do begin to buy, it could add another leg to the stock’s rally, making it worth watching.
A Banking Favorite Emerges
The 2012 list included three different banks: Citigroup (#6), JPMorgan (#9), and Bank of America (#19). In 2013, Bank of America fell out of the VIP list. Of the survivors, Citigroup Inc. (NYSE:C) rose two spots this year, while JPMorgan fell two.
This year, hedge funds prefer Citigroup Inc. (NYSE:C) over its peers. Over the last year, Citigroup has been the best-performing stock — with a gain of 95% compared to Bank of America’s 86% and JPMorgan’s 63% return during the same period.
Back during the recession, the financial index was the largest sector within the S&P 500. Since the financial industry doesn’t actually create anything, it is never good for it to be the largest sector in a developed economy.
Currently, the financial sector is the second-largest in the S&P 500, behind technology. Yet only three stocks total (including AIG) are included as top holdings. To me, this is encouraging for those invested in the sector; along with the value it presents, it shows that there is still a great deal of hedge fund money available to invest.
The banking industry is one of the most undervalued segments in the market. Sure, Citigroup Inc. (NYSE:C) is cheap and trades at just 80% of its book value per share. Yet Bank of America trades at just 65% of its book value per share – and the industry as a whole is still trading with large total loss since the recession in 2008.
Seeing as how the housing market has made a strong comeback, I would watch to see how long this trend lasts. Personally, I expect large banks to become more widely held. They are simply too cheap, have seen too many improvements, and are trading with too much momentum to see such a lack of ownership.
Final Thoughts
Hedge funds don’t always get it right, but as we see which stocks have risen and fallen it should be easy to determine gains and losses that have been created from hedge fund activity.
While American International Group Inc (NYSE:AIG) and Citigroup Inc. (NYSE:C) have seen gains with increased hedge fund buying pressure — Microsoft Corporation (NASDAQ:MSFT), JPMorgan, and Bank of America have seen large moves higher with a drop in hedge fund presence. This is encouraging, indicating that there is still upside potential and available money on the hedge fund table.
The process of comparing stock performance to year-over-year positioning should be telling. You can see where gains/losses have been created, then use it to determine future upside.
The article 3 Compelling Hedge-Fund-Favorite Stocks originally appeared on Fool.com and is written by Brian Nichols.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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