Facebook Inc (FB), Amazon.com, Inc. (AMZN) & More: Top Five Tech Stocks Hedge Funds Like

It’s no surprise that investors like tech stocks. The NASDAQ Composite Index, which contains a lot of large tech companies has gained over 29% since the beginning of the year and analysts expect further growth in 2018 as favorable economic conditions and the new GOP tax plan that cuts the corporate tax to 21% from 35% is expected to provide companies with more cash that they can either invest in R&D or return to shareholders through dividends and buybacks. Cowen analysts estimated that Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), and Facebook Inc (NASDAQ:FB) will save $4.50 billion on taxes in aggregate in 2018 due to the new tax plan, which should provide these companies with a substantial boost in EPS. Moreover, Evercore ISI analysts expect tech stocks to ride a wave of growth as they “are leveraging the Internet to disrupt and take profits from large established industries, a dynamic that is driving real earnings and free cash flow growth.”

Evercore analyst Anthony DiClemente further said in his note to clients that social media giant Facebook Inc (NASDAQ:FB) will be among the best-performing tech stocks in 2018, forecasting a 30% growth. His other favorite stocks are also among the so-called FANG companies, Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL), both of which together with Facebook Inc (NASDAQ:FB) were ranked as ‘Outperform’. The only FANG stock that was not ranked as ‘Outperform’ was Netflix Inc (NASDAQ:NFLX).

Tech stocks were responsible for many records and milestones that the US stock market has hit this year, so it’s not surprising that the stocks are among the darlings of large institutional investors, such as hedge funds. At Insider Monkey, we monitor the investments of more than 650 hedge funds through their quarterly 13F filings and each quarter we compile a ranking of hedge funds’ favorite stocks based on the total number of funds from our database that disclosed long positions in these companies. In this way, as of the end of September, eight out of the top 10 stocks that hedge funds are most bullish on were technology stocks, three of which are the tech stocks mentioned by Evercore ISI as poised for strong returns in 2018.

We monitor hedge funds’ investments not just to compile a ranking of the stocks that they are collectively bullish on. The data is used to identify a group of stocks that have the most potential to beat the market. Through extensive research and real time data collected over the last couple of years, we determined that hedge funds get an edge over smaller investors in the small-cap space, because smaller companies are usually overlooked by the broader market and are not as well covered by analysts and financial media as their larger peers. In this way, Insider Monkey’s best performing hedge funds strategy returned 67.4% since May 2014 and managed to beat the S&P 500 ETF (SPY) by over 20 percentage points. The strategy employs a proprietary methodology to identify the best stock picks of the 100 best performing hedge funds and we share these picks with our premium subscribers in quarterly newsletters. You can read more about our strategy and subscribe to our quarterly newsletter by accessing this link.

In the meantime, let’s take a closer look at top five tech stocks that hedge funds like the most, based on the third-quarter round of 13F filings. In addition, we are going to see how the sentiment towards these stocks changed over the last year.

Let’s start with Alphabet Inc (NASDAQ:GOOGL), which is the fifth favorite tech stock among the investors in our database. There are 127 investors long Alphabet Inc (NASDAQ:GOOGL)’s class A stock as of the end of September, down by one over the quarter. Heading into the fourth quarter of 2016, there were 137 investors long Alphabet Inc (NASDAQ:GOOGL) and it was the fourth-favorite stock. Over the past 12 months, Alphabet Inc (NASDAQ:GOOGL)’s stock gained 33%. Among the major developments in company’s life over the past year were the launch of Pixel 2 and Pixel 2 XL phones and new home speakers, which reassured investors and customers about the company’s plans to increase its market share in the hardware space and compete closer with Apple Inc (NASDAQ:AAPL) and Amazon.com, Inc. (NASDAQ:AMZN).

Amazon.com, Inc. (NASDAQ:AMZN) is tight close in front of Alphabet Inc (NASDAQ:GOOGL) as 133 funds from our database reported holding shares of the eCommerce giant as of the end of September, compared to 132 funds a quarter earlier. However, a year earlier, Amazon.com, Inc. (NASDAQ:AMZN) was the most popular stock among the investors we track, with 150 funds holding shares at the end of September 2016. This number slid quite dramatically to 123 funds at the end of 2016. Amazon.com, Inc. (NASDAQ:AMZN)’s most important milestone in 2017 was the acquisition of supermarket chain Whole Foods, which allowed the tech giant to expand in the food distribution and brick-and-mortar businesses. The move put additional pressure of traditional supermarket chains like Kroger Co (NYSE:KR), which are also facing competition from European discounters Aldi and Lidl, both of which are establishing themselves on American soil. Wal-Mart Stores Inc (NYSE:WMT), which is among the few retailers capable on taking on Amazon, has also been investing in its grocery business and ramping up drive-in grocery delivery of online orders.

Then there is Alibaba Group Holding Ltd (NYSE:BABA), which saw the largest increase in popularity among hedge funds tracked by Insider Monkey. Following the hype surrounding its IPO in September 2014, Alibaba Group Holding Ltd (NYSE:BABA) got a lot of attention from hedge funds and was one of the 10 most popular stocks at the end of that quarter, with 109 funds having reported a long position, which was a good result given that the company went public with just a few days until the end of the quarter. However, following a weak performance, the stock lost some popularity among smart money investors with just 69 funds holding a long position at the end of June 2016. However, a quarter later this number surged to 104 and at the end of September 2017 there were 133 investors in our database bullish on Alibaba Group Holding Ltd (NYSE:BABA). In the meantime, the stock is up by 82% since going public and the company has made a number of big investments in other companies and has been consistently registering a significant growth in quarterly sales.

Microsoft Corporation (NASDAQ:MSFT) registered the largest quarterly increase in popularity among the stocks covered in this article. During the third quarter, the number of funds long the stock went up by 13 to 134, which propelled it to the second most popular stock overall from the sixth spot it held at the end of June. At the end of September 2016, there were 126 investors in our database long Microsoft Corporation (NASDAQ:MSFT). Microsoft Corporation (NASDAQ:MSFT)’s stock has gained over 33% year-to-date as Office 365 and Azure cloud platform continue to be the main growth factors for the company. Evercore ISI analysts consider that Microsoft Corporation (NASDAQ:MSFT) can reach a $1.0 trillion valuation due to strong growth from Microsoft 365 and Azure products.

Facebook Inc (NASDAQ:FB) remained the favorite stock among the hedge funds we track, with 156 funds holding shares as of the end of September, unchanged over the quarter. Moreover, a year earlier, Facebook Inc (NASDAQ:FB) ranked as the second most popular stock with 149 funds reporting long positions. Facebook Inc (NASDAQ:FB)’s stock has gained over 49% in the last 12 months and the company continues to dominate the social media space. At the end of the third quarter, Facebook Inc (NASDAQ:FB) reported 1.37 billion daily active users,up from 1.18 billion a year earlier, while monthly active users also increased by 16% on the year to 2.07 billion. Facebook Inc (NASDAQ:FB) also beat revenue and profit estimates every quarter since September 2016 and every quarter it posted revenue growth between 44.7% and 55.8%.

Instead of the conclusion, it’s worth pointing out that one stock that was among the top five hedge funds’ favorite tech stocks at the end of September 2016 didn’t appear in this year’s top-five ranking. This stock is Apple Inc (NASDAQ:AAPL), in which 109 funds held shares at the end of September 2017, down from 145 funds a year earlier. In 2015, Apple Inc (NASDAQ:AAPL) was a hedge fund darling, ranking among the top five favorite stocks, but since the beginning of the 2016 its popularity has been deteriorating, while Facebook Inc (NASDAQ:FB), on the contrary, was capturing more ground. Nevertheless, Apple Inc (NASDAQ:AAPL) remains a favorite stock of billionaire Warren Buffett‘s Berkshire Hathaway, which has been increasing its exposure to the iPhone maker since adding the company to its equity portfolio in the first quarter of 2016. At the end of September, Berkshire held 134.09 million shares of Apple worth $20.67 billion, which makes it the third most valuable position.

Disclosure: none