Hedge Funds Are Betting on These Five Capital Goods Stocks

With unemployment near 5% and corporations more confident than ever, the U.S. economy is firing on all cylinders. Given the strong economy, many investors are rotating from consumer durables into more cyclical capital good stocks such as General Motors Company (NYSE:GM), Comcast Corporation (NASDAQ:CMCSA), Illumina, Inc. (NASDAQ:ILMN), Visteon Corp (NYSE:VC), and Danaher Corporation (NYSE:DHR). Without any further ado, let’s take a closer look at the smart money’s top picks in the sector.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Danaher Corporation (NYSE:DHR)

– Number of Hedge Fund Holders (as of September 30): 53
– Total Value of Hedge Fund Holdings (as of September 30): $1.98 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 3.40%

Analysts continue to like Danaher Corporation (NYSE:DHR), as Deutsche Bank recently upped its price target to $97 from $94, writing Danaher remains the ‘gold standard of industrial companies as it relates to pretty much everything we care about: quality of portfolio, quality of management, quality of processes, and willingness to change/adapt with market conditions and investor interests’. Execution hasn’t been a problem for the company, as Danaher recently reaffirmed its adjusted EPS guidance of $1.25-$1.29 for the fourth quarter of 2015. The company also anticipates adjusted EPS of $4.80-$4.95 and to spin off its industrial units into a separate unit next year.

#4 Visteon Corp (NYSE:VC)

– Number of Hedge Fund Holders (as of September 30): 56
– Total Value of Hedge Fund Holdings (as of September 30): $1.56 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 38.10%

Seven analysts have ‘Buy’ ratings, and one has a ‘Hold’ rating on cockpit electronics producer Visteon Corp (NYSE:VC). After completing the sale of Halla Visteon Climate Control for $3.2 billion (after taxes) in June, Visteon plans to return over $2.5 billion of that to shareholders through special distributions and share repurchases. The big buybacks ensure a healthy bid for the company’s stock, which is up by 7.7% year-to-date. Among the 56 elite funds long the stock at the end of the third quarter are Mark Kingdon’s Kingdon Capital and David Cohen and Harold Levy‘s Iridian Asset Management.

#3 Illumina, Inc. (NASDAQ:ILMN)

– Number of Hedge Fund Holders (as of September 30): 62
– Total Value of Hedge Fund Holdings (as of September 30): $2.25 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 8.90%

Illumina, Inc. (NASDAQ:ILMN) recently announced that it has entered into an agreement with Chinese firm Novogene to jointly develop a diagnostic system based on next-generation sequencing technology for clinical oncology testing and prenatal DNA in the China. Although the financial terms weren’t disclosed, the agreement further improves Illumina’s growth prospects, which are sky-high given the impending breakthroughs in biotech over the next two decades. A total of 62 funds owned $2.25 billion of Illumina shares at the end of the third quarter. Among them is Stephen Mandel’s Lone Pine Capital, which had a position of 3.61 million shares.

#2 Comcast Corporation (NASDAQ:CMCSA)

– Number of Hedge Fund Holders (as of September 30): 80
– Total Value of Hedge Fund Holdings (as of September 30): $8.57 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 6.00%

Although cable is unquestionably in secular decline, Comcast Corporation (NASDAQ:CMCSA) has hedged itself well, given its ownership of NBC universal, and its fast growing high speed internet division. With only 75% of U.S. households having high speed internet, there is plenty of growth ahead for that unit. Meanwhile, Comcast shares trade at a modest 15.89 times forward earnings and pay a 1.7% dividend. The hedge fund sentiment towards the stock has been stable, with 80 funds owning shares of Comcast at the end of the third quarter, up from 76 funds that were long the stock at the end of June.

#1 General Motors Company (NYSE:GM)

– Number of Hedge Fund Holders (as of September 30): 88
– Total Value of Hedge Fund Holdings (as of September 30): $5.11 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 10.80%

About one out of three drivers say that they’re open to autonomous cars, meaning that General Motors Company (NYSE:GM) will still have plenty of demand for its regular vehicles. Although it is currently not in the lead in the driverless technology, General Motors has the resources to hire someone like George Hotz or acquire/hire enough Silicon Valley startup tech to get to the leading edge quickly. With driverless tech, a GM car on-demand service isn’t out of the question and could be a big earnings driver. The shares look attractive, with a forward P/E of 6.3 and a dividend yield of 4.22%. Warren Buffett’s Berkshire Hathaway owned 50 million shares of GM at the end of September.

Disclosure: none