We recently compiled a list of the Goldman Sachs’ Best Hedge Fund Stock Picks: Top 20 Stocks. In this article, we are going to take a look at where CRH plc (NYSE:CRH) stands against Goldman Sachs’ other hedge fund stock picks.
The close of August has marked a highly awaited paradigm shift on Wall Street that investors have been wishing for months. This shift comes after Federal Reserve Chairman Jerome Powell finally admitted that the time for interest rate cuts had come. Investors rejoiced and the flagship S&P index gained 1.15% while the Dow’s blue chip stock index added 1.14% to its value.
Before the Fed chair’s remarks, investment bank Goldman Sachs had already taken a detailed look at the implications of interest rate cuts on the stock market. In a podcast, the bank’s trading strategy head Josh Schiffrin started by explaining that the prospect of the Fed reducing rates was linked “very closely to the performance of short-term bonds.” He however added that it’s “really been bonds that have been responsive, where the story has been quite clear,” pointing out that “the stock market has been range bound and choppy with a fair amount of rotation between different sectors” which leads to index level moves being “muted.” This makes sense when we consider the Dow and S&P’s movements following Powell’s latest comments, as the one percentage point gain for each indicated that investors were well prepared for rate cuts even before the Fed Chair took the stand.
Speaking of the flagship S&P index, GS’ head of American Equity Sales Trading John Flood shared some insights at the June close. Starting off by highlighting the drives of the index’s performance during the first half of the year, Flood outlined that when it came to hedge funds, artificial intelligence and GLP-1 were the two key trends that had driven index returns. He described it as “a long momentum trade” with “both cohorts” of the hedge fund side, namely the “systemic and fundamental long-short” fully involved in trading.
The Goldman equity head also added that retail investors were finally back as well, and they were focused on “focused on the ten biggest stocks in the world.” You can see which companies these might be by reading 20 Largest Companies in the World by Market Cap in 2024. One key concern among investors and analysts alike this year has been a bifurcation in market returns that has seen only the best performers yield most of the rewards. This was also on the mind of analysts from another well known Wall Street bank, who added that it created an opportunity for further profits. Flood shared that while five stocks accounted for “60% of S&P 500’s return year to date,” this sharp divide did not make him uncomfortable.
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The investor flood of optimism surrounding AI, which has pushed the shares of the top AI GPU designer in the world to post an unbelievable 321,150% in all time returns, has also led to worries that the market might be witnessing another period akin to the ill fated dotcom era of the 1990s. When asked whether this period reminded him of that time, Flood replied that his firm felt “a little bit more like 1995 than 1999. And 1995 clearly was a very positive year for the stock market and a positive run,” particularly since “valuations and earnings from market leaders are way friendlier today than they were in 1999.” Concluding by sharing that he felt “very bullish” the analyst also forecast his estimate for the flagship S&P. His estimate? Well, Flood believes that “you could see S&P 500 trade well north of 6,000 this year as the biggest get bigger and we continue to just see a little bit of a news vacuum into the elections right now.”
The bit about market bifurcation between big and small companies was also on the mind of GS’ senior US portfolio strategist Ben Snider. He commented on the jump in small cap stocks in July when they gained as much as 2% while other indexes lost up to 1.98% due to investors positioning themselves for potential interest rate cuts. Snider explained that small cap stocks tend to take on more debt, and lower rates coupled with their lower market values lead to big gains. According to him “if just 1% of assets comes out of the S&P 500 and flows into, for example, the Russell 2000 Small Cap Index, that 1% of S&P 500 market cap would represent more than 15% of Russell 2000 market cap.” Coming back to AI, the Goldman strategist has a tip for those who might be worried that the hype surrounding AI might be more than the technology’s ability to generate money for the firms that plan to plow a trillion dollars into it. He shared that as opposed to the market cap weighted benchmark S&P, it might be prudent to invest in the equal weight variant “if you are concerned about the degree of concentration or AI investment.”
Speaking of AI, GS was also out with a detailed report in July which analyzed the year to date returns of different AI sectors. The AI stack, broadly speaking, is made up of four categories of firms. Starting from the bottom of the pyramid and moving upwards, these are chip manufacturers and designers, those that provide AI capacity like server farms, firms that sell AI products, and finally, companies that will see the largest gains from the ubiquitous or near ubiquitous adaptation of AI. As per GS, the year to date returns of these four sectors as of late July were 139% (represented only by the top AI GPU stock), 22%, -2%, and 2% respectively. One of the strongest performers within the AI infrastructure segment is utilities, and there’s further room ahead as analyst Ryan Hammond believes that “after adjusting valuations for the improvement in long- term EPS growth expectations that the sector has experienced, Utilities’ PEG (P/E to long term growth (LTG)) ratio is 2x, well below the historical average of 3x.”
So, with GS taking a broad view of the market, we decided to see which hedge fund stocks the bank is a fan of.
To make our list of Goldman Sachs’ top hedge fund stocks, we ranked the bank’s list of stocks with the number of hedge funds that, according to its data, had the stock as a top ten holding.
We also mentioned the total number of hedge funds that had bought these stocks as per Insider Monkey’s data. 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 construction worker wearing a hard hat and safety glasses at a site, carrying concrete blocks.
CRH plc (NYSE:CRH)
Number of Hedge Fund Investors in Q2 2024: 75
GS’ Number Of Funds: 18
CRH plc (NYSE:CRH) is a leading player in the global construction materials industry. It provides aggregates, construction materials, beams, pipes, and other products. CRH plc (NYSE:CRH)’s diversified product base as well as a global presence means that it benefits from lower costs through economies of scale. At the same time, the fact that it focuses exclusively on the construction industry means that the firm struggles when construction spending drops due to weak economic activity. This trend was clear in 2022 when CRH plc (NYSE:CRH)’s shares lost 24% during the year as the Federal Reserve tightened interest rates to control inflation. High rates lead to a slowdown in construction due to difficulties with working capital finance and capital generation. While it is a global player, North America represents 75% of CRH plc (NYSE:CRH)’s operating income. This positions it well to utilize increased US government spending on semiconductor fabs, green energy infrastructure, and overall infrastructure through initiatives such as the CHIPS and Science Act, the Bipartisan Infrastructure Act, and the Inflation Reduction Act.
L1 Capital mentioned CRH plc (NYSE:CRH) in its Q2 2024 investor letter. Here is what the firm said:
“In our view, measuring the performance of investments over short time horizons such as three months is meaningless. While CRH and Eagle Materials detracted from the Fund’s returns this quarter, they were both leading positive contributors in the prior quarter. Since Inception of the Fund over 5 years ago, both companies have been top ten contributors to the Fund’s returns.
Recently, there has been some negative data that is causing a sell-off in the share price of CRH and Eagle Materials. Both these companies supply building products to the infrastructure, residential and commercial construction sectors. CRH has around 75% exposure to North America, with the remainder principally Europe (CRH has also recently acquired the majority of Adbri in Australia). Eagle Materials solely operates in the U.S.
Demand from the U.S. infrastructure sector is likely to remain robust for the medium term due to increased Federal and State spending, supported by the $1.2 trillion Infrastructure Investment and Jobs Act. Short term activity has been disrupted by bad weather – we think this is complete noise and is just slightly delaying projects, although CRH and Eagle Materials’ June 2024 quarterly results will likely be impacted.
Housing activity has recently softened a little, with affordability remaining an issue. Demand for housing remains strong, and the housing construction industry is responding through incentives such as subsidising mortgage rates for buyers, and building slightly smaller, cheaper homes.
While there will always be short term fluctuations in activity levels and we do expect softening in apartment construction, over time we expect solid new housing construction as well as repair and renovation activity levels to support demand for CRH and Eagle Materials’ products, with potential for meaningful upside in a lower interest rate environment. Commercial activity remains mixed, with pockets of strength such as data center construction and resilient areas such as hospital and education construction, offset by weakness in areas such as office construction.
In our view the market is not always efficient. Back in our December 2022 Quarterly Report we were pounding the table on Amazon.com (Amazon), stating that the share price had been oversold and offered compelling value. Since then, Amazon’s share price has increased nearly 140%. Over recent months, the share price of Eagle Materials and CRH have fallen 20% and 15% respectively from their recent highs. Now trading on a P/E ratio of 13x to 14x, we consider both companies are trading at attractive valuations for investors with a longer-term investment horizon, willing to look through short term pressures.”
Overall CRH ranks 12th on our list of Goldman Sachs’ hedge fund stock picks. While we acknowledge the potential of CRH as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CRH 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.