Analyst Recommends 10 Best Stocks to Diversify Your Portfolio Away from Mega-Cap Tech and AI Stocks

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In this article, we will take a detailed look at Analyst Recommends 10 Best Stocks to Diversify Your Portfolio 

Venu Krishna, Head of U.S. Equity Strategy & Global Equity Linked Strategies at Barclays, recently shared a basket of stocks he recommends offsetting the risks that come from market concentration in big tech stocks. In an interview with CNBC, Krishna emphasized that he remains inclined towards big tech stocks, but the important question he addressed is which stocks offer more value outside of the tech sector in the long term.

Krishna’s methodology to find some of the best stocks outside of the tech sector is simple: find out at what “core fundamental” metrics big tech stocks are “excelling” at and then “try to come close to that and create a portfolio which can give us that kind of exposure.” Through this methodology, Krishna says, he came up with a well-diversified portfolio of stocks that could act as a “hedge” against market concertation in big tech.

Krishna said he applied “liquidity filters” on the whole market to remove a “bunch of companies” and narrow down to stocks with strong growth and FCF multiples.

Despite him pointing out the concentration of gains problem, Venu Krishna believes the rise of big tech stocks is a “healthy trend” and some of the gains are now bifurcating to other sectors, too.

However Krishna said that over the past 18 months his portfolio of stocks has lagged behind the Big Tech, but outperformed equal-weighted S&P 500 and market cap-weighted S&P 500.

For this article, we took a look at Krishna’s latest basket of stocks to offset concentration in big tech risks and picked 10 stocks with the highest number of hedge fund investors. 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).

10. PulteGroup Inc (NYSE:PHM)

Number of Hedge Fund Investors: 39

Home construction company PulteGroup Inc (NYSE:PHM) is one of the stocks Venu Krishna, Barclays head of U.S. equity, is recommending to offset the tech concentration risk. PulteGroup Inc (NYSE:PHM) shares have gained about 57% over the past one year. The stock recently jumped following a broader optimism in the market that a lower-than-expected inflation recorded last month could result in a decrease in mortgage rates. PulteGroup Inc’s (NYSE:PHM) Q1 results impressed the Wall Street, as revenue jumped about 10% in the quarter on a YoY basis despite headwinds in the industry.  Homebuilding gross margins in the quarter jumped 50bps to 29.6% even after a decline in sale prices.  PulteGroup Inc (NYSE:PHM) is also seeing a rebound in the market. Net orders in the quarter rose 14% to 8,379 while cancellations dropped to 10% from 13%. PulteGroup Inc’s (NYSE:PHM) backlog is now worth about $8.3 billion, up about 3% from last year. The company has also increased guidance for gross margins. Here what the management said during the latest earnings call:

Based on Q1 sign-ups and the composition of our backlog, we expect the geographic mix of closings to be more balanced as we move through the remainder of the year. That being said, we’re raising our gross margin guide for the remainder of ’24. We had previously guided to quarterly gross margins of 28% to 28.5%, but we now expect gross margins in the second quarter to be approximately 29.2%. Based on current backlog, we would expect gross margins for our third and fourth quarters to be approximately 29%, but we still have homes to sell and close, so demand conditions over the coming months will impact the results we ultimately report. Beyond buyer demand and near-term pricing dynamics, the gross margin guide for the remainder of ’24 also reflects expected changes in the geographic mix of homes we expect to close.

9. Ulta Beauty Inc (NASDAQ:ULTA)

Number of Hedge Fund Investors: 52

Barclays in a latest report pitched Ulta Beauty Inc (NASDAQ:ULTA) as a stock to diversify your portfolios in a concentrated market. Ulta Beauty Inc (NASDAQ:ULTA) in May posted Q1 results. Adjusted EPS in the quarter came in at $6.47 per share, surpassing estimates by $0.19. Revenue in the period jumped 3.8% year over year to $2.7 billion, missing estimates by $30 million. Comparable sales in the period jumped 1.6%. Ulta Beauty Inc (NASDAQ:ULTA) is operating in the lucrative beauty industry that has secular growth catalysts. Ulta bulls believe Ulta Beauty Inc’s (NASDAQ:ULTA) loyalty program and its products offered for a variety of budget ranges give it an edge over competitors.

During the latest earnings call Ulta Beauty Inc’s (NASDAQ:ULTA) management talked about its loyalty program and memberships growth:

“Our world class loyalty program expanded again this quarter with the retention of our most valuable members remains very strong. We ended the quarter with 43.6 million Ulta Beauty rewards members, 6% higher than last year, primarily driven by member retention. Additionally, we continued to acquire new members and reengage lapsed members. Targeted marketing efforts are elevating more members to our platinum and diamond tiers, and exclusive promotions, point accelerators and personalized contents are driving engagement and retention of these valuable members. Our new store portfolio continues to perform well.

During the quarter, we opened 12 stores, seven more than last year, and their performance exceeded our expectations. Our associate retention has improved across stores, distribution centers and our corporate teams, and we are on track to complete critical elements of our transformational agenda this year, giving us a stronger foundation for future growth.”

Read the full earnings call transcript here.

Ulta Beauty Inc (NASDAQ:ULTA) is expanding in Mexico via its partnership with Grupo Axo. Analysts believe after testing the Mexican market, Ulta Beauty Inc (NASDAQ:ULTA) could mull expansion in different Latin American markets where Grupo Axo already has a strong footprint.

Average analyst price target set by Wall Street for Ulta is $488, which presents a 25% upside potential from the current levels. Given analysts expect Ulta Beauty Inc’s (NASDAQ:ULTA) earnings to grow 9.90% next year, Ulta’s forward P/E ratio of 15 makes the stock attractively valued.

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