We recently compiled a list of the 10 Stocks Hedge Funds Are Crazy About Right Now. In this article, we are going to take a look at where NVIDIA Corporation (NASDAQ:NVDA) stands against the other hedge fund-approved stocks.
Investing, broadly speaking, narrows down to two strategies. These see an investor decide whether to buy a stock for the short term and make quick profits or hold it for years to patiently wait for the returns to accrue. One of the most successful investor of our times, Warren Buffett (see his latest portfolio), is an ardent follower of the latter approach, and his wealth bears testament to his success.
Of course, deciding to pick the right stocks to sit on for years isn’t easy or else everyone would be rich by now. However, there are ways in which one can gain an edge over others. One such way is to see what the professionals are doing and then emulate their strategy. At Insider Monkey, we get right at the heart of investing by picking out the top stocks that hedge funds are investing in. Why hedge fund stock picks? Well, these professionals, who almost often charge an arm and a leg for their services, conduct extensive due diligence to pick out the right set of stocks. After all, no one would invest with a hedge fund if the fund was simply picking stocks by flipping a coin.
Yet, while due diligence is great and necessary to protect investors, investing, at the end of the day, is all about returns. By the looks of it, the funds do seem to know what they’re doing. Last year, the top ten hedge fund stock picks ended up outperforming the S&P benchmark stock index by 48.9 percentage points. In other words, while the index returned 26.1% in 2023, the top ten stocks returned 75.1% through price gains. This trend is also present in the top 30 hedge fund stocks of 2023 as these posted 53.2% in gains to outperform the S&P by 27 percentage points. Unsurprisingly, year to May 29th, the top 30 hedge fund stocks of 2024 led the S&P’s 11% and posted 20.2% in gains.
Unfortunately, though, data shows that as of 2021 end, 14% of the stock market was made of active funds while 16% was accounted for by passive funds. Compared to passive funds accounting for 8% of the market a decade ago with 20% belonging to active funds, it’s clear that the broader public believes that shifting to passive is a safer investment approach. After all, while everyone wants to make money, no one wants to lose it either.
But what if one could make their own investing decisions and gain an inside track to investing by figuring out what stocks most hedge funds have invested in? Well, at Insider Monkey we regularly compile data from more than 900 hedge funds to see where the smart money is headed. This is how we know that the top hedge fund stocks outperformed the benchmark index last year, and it’s also a strategy that’s helped us beat the market over the last 10 years. Compared to the SPY’s 235.6% in returns between 2014 and May 2024, the 10 most popular stocks among hedge funds returned 463.7%.
But wait. At this point, you could argue that since hedge fund SEC filings come with a 45 day lag, perhaps they aren’t that important. After all, it might be more important to know what the funds are doing now. Well, since we’ve been compiling top hedge fund stocks since 2012 in our quarterly newsletter, we can guarantee you that the top hedge fund stocks haven’t changed by much since 2018. So not only isn’t the time lag that significant, but by subscribing to our newsletter, you can gain an early track to see which stocks are falling out of favor among the funds as well.
So, all this talk about the top hedge fund stocks might make you wonder about the stocks themselves. Curious? Check out the 31 Most Popular Stocks Among Hedge Funds. We also cover legendary investors through pieces such as Warren Buffett’s 12 Longest Held Stocks.
Our Methodology
To make our list of the top ten hedge fund stocks, we scanned Insider Monkey’s database of 900+ hedge fund filings for Q1 2024 and picked out the stocks with the highest number of investors.
A close-up of a colorful high-end graphics card being plugged in to a gaming computer.
NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Investors In Q1 2024: 186
NVIDIA Corporation (NASDAQ:NVDA) is the darling of Wall Street and the tech world right now. Key to the firm’s success, particularly in the AI sphere, is its CUDA platform which enables customers to speed up their computing applications solely on NVIDIA Corporation (NASDAQ:NVDA)’s platform. CUDA, along with leading edge chip manufacturing technologies from chip contract manufacturer TSMC, are NVIDIA Corporation (NASDAQ:NVDA)’s key moats as they help ensure that its products are industry leaders in performance despite similar silicon being available from both Intel and AMD.
NVIDIA Corporation (NASDAQ:NVDA)’s competitive moat and the potential for its largest customers like Alphabet and Microsoft to develop their own AI chips was also on the mind of well known investment firm Harding Loevner in its Q1 2024 investor letter. A classic contrarian move, Loevner exited its NVIDIA Corporation (NASDAQ:NVDA) stake in the quarter, and its note mentions key reasons such as difficulty in estimating the “ultimate size of the total addressable market.” The full note is too long to share here and merits a complete read. Here’s one relevant snippet:
While NVIDIA is expected by many to capture the lion’s share of this market for years to come, history tells us that it becomes increasingly difficult for a stock to outperform when expectations are so high. At the advent of the commercial internet, Cisco Systems, which makes the networking equipment that enables much of the internet, occupied a similarly strategic vantage point for the new era. By March 2000, it was the world’s most valuable company. Cisco and its investors were right about the internet: it did change everything. The company’s routers remain a key piece of infrastructure. However, Cisco’s stock price tumbled 88% from its peak and took 20 years to recover. The earnings growth implied by the price investors were willing to pay took longer to arrive than the novelty of the technology took to capture their imagination.
NVIDIA is not Cisco, but its share price suggests that investors may be overestimating the durability of the company’s market position. Warren Buffett once wrote that “the key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” One threat to NVIDIA’s competitive advantage comes from its own client base, as some key customers begin to invest in backward integration.
Overall NVDA ranks 5th on our list of the best hedge fund-approved stocks to buy. You can visit 10 Stocks Hedge Funds Are Crazy About Right Now to see the other hedge fund-approved stocks that are on hedge funds’ radar. While we acknowledge the potential of NVDA as an investment, our conviction lies in the belief that 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 NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.
Disclosure: None. This article is originally published at Insider Monkey.