Hedge Funds’ #1 Stock Picks in Video Games, Casinos, Restaurants, & More

Rising net demand for allocating to hedge funds has hit a three-year high, as the $3 trillion hedge fund industry scored high marks among investors for its performance during the 12-month period from June 2017 to June 2018, despite persistent high fees. 66% of investors felt their expectations were met or exceeded during the period according to survey data from Preqin, up from a dismal 21% two years earlier.

Insider Monkey’s flagship “Best Performing Hedge Funds Strategy” has returned over 50% in the last year, destroying the market by 29 percentage points. Since its May 2014 inception, the easy-to-follow strategy has returned 121%, beating the bull market by more than 54 percentage points. The hedge fund strategy’s small number of quarterly picks often span a range of industries. In our May 16 newsletter, customer service platform Zendesk Inc (NYSE:ZEN) and pharmaceutical company FibroGen Inc (NASDAQ:FGEN), each of which gained over 10% during the following 2.5 months, were among the seven stock picks for the quarter.

Check out a detailed analysis of Insider Monkey’s past performance and quarterly stock picks for all the details.

In this article, we’ll take a look at hedge funds’ top stock picks in various industries, using Insider Monkey’s own data that covers the 645 hedge funds in our system which filed 13Fs for the June 30 reporting period. Included on the list are hedge funds’ favorite restaurant, aerospace, and casino stocks, beginning with the most popular video game stock among hedge funds.

Hedge Funds’ #1 Video Game Stock Pick: Electronic Arts Inc. (NASDAQ:EA)

Number of Hedge Fund Shareholders of EA (as of June 30): 79

Value of Hedge Funds’ Holdings in EA (as of June 30): $6.32 billion

There was a large inflow of hedge funds into Electronic Arts Inc. (NASDAQ:EA) during the second-quarter, pushing it well past Activision Blizzard, Inc. (NASDAQ:ATVI) (66 hedge funds) into a commanding lead among video game stocks (note that we don’t count Microsoft Corporation (NASDAQ:MSFT), the second-most popular tech stock among hedge funds, as a gaming stock, owing to its gaming division’s minimal impact on the company’s overall performance). Hedge fund ownership of EA jumped by 18 to 79, while the amount of money invested in the company jumped by slightly over $1 billion. Jacob Doft’s Highline Capital (486,300 shares) and Christopher Medlock James’ Partner Fund Management (291,101 shares) were some of the many funds to buy EA shares in Q2.

A growing wave of loot box legislation against gaming companies like Electronic Arts Inc. (NASDAQ:EA) due to the gambling-like nature of their in-game reward systems has done little to dampen investor enthusiasm for those companies thanks to surging earnings. Electronic Arts Inc. (NASDAQ:EA) recently lowered its fiscal 2019 net booking guidance to $5.2 billion from $5.55 billion, citing the delay of Battlefield V in addition to currency exchange headwinds.

Hedge Funds’ #1 Casino Stock Pick: MGM Resorts International (NYSE:MGM)

Number of Hedge Fund Shareholders of MGM (as of June 30): 51

Value of Hedge Funds’ Holdings in MGM (as of June 30): $2.63 billion

MGM Resorts International (NYSE:MGM) is the top-ranked casino stock, leading Wynn Resorts, Limited (NASDAQ:WYNN) by seven hedge funds. Hedge fund ownership of MGM did fall by four during the second-quarter to 51, while the value of hedge funds’ holdings fell by 33% to $2.63 billion. Eric W. Mandelblatt’s Soroban Capital Partners slashed its MGM holding by 44% to 12.46 million shares during Q2.

MGM Resorts International (NYSE:MGM) is poised to capitalize on the legalization of sports betting in the U.S with the pending launch of a sports betting app. Resorts Casino Hotel, in partnership with DraftKings, became the first casino in the U.S to accept mobile sports bets last week, on a limited basis. $150 billion is currently bet on sports each year in the U.S and that figure is expected to grow rapidly thanks to legalization, which went into effect earlier this year.

On the next page we’ll share hedge funds’ top stock picks in the restaurant, tobacco, and aerospace industries.

Hedge Funds’ #1 Restaurant Stock Pick: McDonald’s Corporation (NYSE:MCD)

Number of Hedge Fund Shareholders of MCD (as of June 30): 44

Value of Hedge Funds’ Holdings in MCD (as of June 30): $1.32 billion

McDonald’s Corporation (NYSE:MCD) is the most popular restaurant stock among hedge funds as of June 30, though the top players in the industry have lost quite a bit of hedge fund support over the past few years. 44 hedge funds in our system owned McDonald’s at the end of June, down from 63 two years ago. Cliff Asness’ AQR Capital Management owned 1.13 million McDonald’s shares on June 30, down by 17% from a quarter earlier.

McDonald’s Corporation (NYSE:MCD) announced in mid-August that the company and some of its franchisees will spend $6 billion modernizing the majority of McDonald’s locations by 2020. Among the host of changes will be digital self-ordering kiosks, refreshed interiors with new furniture, and designated parking spaces for pick-ups through mobile ordering. Some of those changes have already been rolled out at a limited number of locations. Morning coffee rival Dunkin Brands Group Inc (NASDAQ:DNKN) is also undertaking the addition of digital kiosks and mobile orders at a few dozen test stores to open by the end of this year as the service industry rapidly shifts to meet the demands of more tech-focused and time-starved consumers.

Hedge Funds’ #1 Tobacco Stock Pick: Philip Morris International Inc. (NYSE:PM)

Number of Hedge Fund Shareholders of PM (as of June 30): 43

Value of Hedge Funds’ Holdings in PM (as of June 30): $3 billion

Philip Morris International Inc. (NYSE:PM) leads rival Altria Group Inc. (NYSE:MO) by a count of 43 to 35 in hedge fund ownership, ranking it as the most popular tobacco stock. Nonetheless, there was a small flight from the stock during a brutal Q2 that battered the shares of both companies. Ownership of Philip Morris among hedge funds fell by seven to 43 during the second-quarter, while the amount invested in the stock declined by 33% to $3 billion.

Philip Morris International Inc. (NYSE:PM) is hovering around 3-year lows as the tobacco industry struggles to stem the flow of lost nicotine addicts. The company has expressed a long-term goal of phasing out its traditional tobacco products completely in favor of smoke-free, reduced-risk products. Japanese sales of its heated tobacco system iQOS have been strong, which has Philip Morris optimistic as it converts factories to produce iQOS units in greater quantities ahead of its entrance into additional markets. However, Philip Morris had to revise down its heated tobacco shipment expectations recently, and some potential markets like India have been throwing up worrisome signals lately, with that country’s health ministry calling for the banning of heated tobacco products like iQOS.

Hedge Funds’ #1 Aerospace Stock Pick: Boeing Co (NYSE:BA)

Number of Hedge Fund Shareholders of BA (as of June 30): 53

Value of Hedge Funds’ Holdings in BA (as of June 30): $3.41 billion

Boeing Co (NYSE:BA) soars above all other aerospace stocks with 53 of the 645 hedge funds in our system owning the stock on June 30. That was a slight decline from 57 at the end of March. Doug Silverman and Alexander Klabin’s Senator Investment Group raised its Boeing position by 35% to 850,000 shares during the second-quarter.

Boeing Co (NYSE:BA) has been struggling with production and supply-chain issues, which has lead to a mounting backlog of 737 orders, as well as a growing number of undelivered Dreamliners at its Charleston manufacturing facility. Boeing aimed to boost 737 output to 52 per month from 47 last year, but has faced parts delays from several suppliers that have been unable to keep up with the increased demand. Among them are engine supplier CFM International, cabin components supplier Astronics Corp., and fuselage supplier Spirit AeroSystems Holdings, Inc. (NYSE:SPR).

Disclosure: None