In this article, we discuss the 10 stocks that hedge funds were right about in 2021. If you want to skip our detailed analysis of these stocks, go directly to Hedge Funds Were Right About These 5 Stocks in 2021.
November was not a good month for hedge funds, overshadowing an otherwise strong performance that stretched back to the early days of the pandemic. According to research firm PivotalPath, hedge funds were collectively down nearly 2% in November as the spread of the omicron variant of COVID-19 fueled market uncertainty. Hedge fund outlook was also affected by increased regulatory scrutiny on quant hedge funds in China that saw many firms scale back expansion plans and restrict inflows. In the past two years, the assets under management at these funds had jumped fivefold, per news publication Bloomberg.
However, the drip seems a temporary setback for the investment industry in the US as many firms have already positioned their portfolios for the upcoming macro economic environment. In 2021, hedge funds made some solid bets on companies like Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL) that are likely to pay handsome returns to them in the long-term. Some of the best performing stocks in this regard are discussed in detail below.
Our Methodology
The companies listed below were picked from a database of 867 hedge funds maintained by Insider Monkey. The stocks that featured among the top 30 most popular hedge fund picks over the first three quarters of the year, available for detailed viewing here, here, and here, were identified.
Only those firms that have remained in the 30 most popular stocks among hedge funds for all three quarters were selected and sorted based on their year-to-date gains.
The analyst ratings and business fundamentals of each company are also discussed to provide readers with some additional context for their investment choices.
The hedge fund sentiment around each stock was calculated using the data of 867 hedge funds tracked by Insider Monkey.
Hedge Funds Were Right About These Stocks
10. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 95
Year-to-Date Gain in Share Price: 16%
Adobe Inc. (NASDAQ:ADBE) has consistently beaten market expectations on earnings for the last several years, 11 times in the past 12 quarters to be exact. This year, the firm has raised guidance twice in three quarters. Adobe Inc. (NASDAQ:ADBE) has maintained high margins due to competitive positioning and analysts expect it to grow revenue further in the coming months. Even as growth stocks undergo a period of uncertainty due to inflation troubles, Adobe Inc. (NASDAQ:ADBE) is expected to weather the impact better than peers due to brand loyalty and an aggressive acquisition strategy.
Adobe Inc. (NASDAQ:ADBE) is also a favorite stock among hedge funds. Washington-based investment firm Fisher Asset Management is a leading shareholder in Adobe Inc. (NASDAQ:ADBE) with 6.4 million shares worth more than $3.7 billion. Latest data shows that 95 funds with stakes worth $12.6 billion were long Adobe Inc. (NASDAQ:ADBE) at the end of September 2021.
Just like Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), Adobe Inc. (NASDAQ:ADBE) is one of the stocks on the radar of elite investors.
Here is what Polen Capital has to say about Adobe Inc. (NASDAQ:ADBE) in its Q1 2021 investor letter:
“Adobe Inc. (NASDAQ:ADBE) and Autodesk are both prime examples of the rotation that occurred during the quarter. Both are dominant businesses in their respective markets, which are experiencing structural tailwinds. Despite each business’s position of strength, the stocks of cyclicals and businesses with higher leverage and lower profitability were more favored this past quarter. In stark contrast, Adobe Inc. (NASDAQ:ADBE) and Autodesk both have low leverage, high levels of profitability, high recurring revenues that mitigate cyclicality, and are both capital-light business models—all attributes we appreciate as investors. Adobe and Autodesk were also two of the top three performers within the Portfolio during 2020.”
9. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Holders: 106
Year-to-Date Gain in Share Price: 17%
Netflix, Inc. (NASDAQ:NFLX) stock has been hit in recent weeks as the competition in the streaming industry heats up. However, some analysts believe that Netflix, Inc. (NASDAQ:NFLX) can inflate subscriber numbers considerably by restricting password sharing or limiting the number of screens or devices per user. Netflix, Inc. (NASDAQ:NFLX) is also far ahead of competition with regards to average revenue per user, a metric of more relevance to investors than subscribers.
Netflix, Inc. (NASDAQ:NFLX) also has the advantage because it is more focused on streaming and innovation, where the parent companies of competitors, like Disney or Apple Inc. (NASDAQ:AAPL), have core interests in other businesses. This is why hedge funds have been bullish on Netflix, Inc. (NASDAQ:NFLX) this year despite misleading headlines.
106 funds out of 867 tracked by Insider Monkey held stakes in Netflix, Inc. (NASDAQ:NFLX) at the end of the third quarter of 2021 worth $14.7 billion. Among these funds, Chicago-based Citadel Investment Group was a leading shareholder in Netflix, Inc. (NASDAQ:NFLX) with 4.3 million shares worth more than $2.6 billion.
In its Q1 2021 investor letter, Polen Capital, an asset management firm, highlighted a few stocks and Netflix, Inc. (NASDAQ:NFLX) was one of them. Here is what the fund said:
“We purchased Netflix, Inc. (NASDAQ:NFLX) in March, initiating a 3% position in the Portfolio. We believe Netflix is a highly competitively advantaged company. It has recently met all our investment guardrails, and we anticipate it will remain sustainably above our guardrails over the next five years and beyond. We know Netflix for its ubiquitous streaming service and deep library of owned content. The company has made investments in this content (currently running at nearly $20 billion/year), generally keeping subscribers highly engaged and loyal to their service. The company has number one market share in 99% of markets globally, but it is our view that video streaming on-demand is still an underpenetrated space with many years of attractive growth likely ahead. The service is also relatively affordable at roughly $11/month on average globally.
We believe Netflix, Inc. (NASDAQ:NFLX)’s growth in content spend is beginning to moderate, which could allow margin expansion to continue for many years when paired with ongoing subscriber growth and price increases. While there is competition from the likes of Apple (Apple TV+), Amazon (Prime Video), Disney (Disney+ and Hulu), and others, we believe there can be a handful of winners in this industry. Already, we see many people subscribe to multiple streaming video services, with Netflix, Inc. (NASDAQ:NFLX) being their “anchor” service. That said, the barriers to entry are high, and we believe they are getting higher given the substantial amount of capital and size of the subscriber base required to maintain a competitive service for both viewers and content producers. Over the next five years, we expect Netflix’s earnings growth to be approximately 30% annualized and free cash flow to grow at an even higher rate.”
8. ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 87
Year-to-Date Gain in Share Price: 22%
ServiceNow, Inc. (NYSE:NOW) stock offers incredible growth opportunities at a very reasonable price considering the fact that over 85% of the companies which feature on the Fortune 500 use the products of the firm. Analysts expect ServiceNow, Inc. (NYSE:NOW) to grow revenue at a rate of over 25% for the coming years. Investors can pick up the shares at a discounted price owing to the dip around growth companies in general at the market. The rise in share price of ServiceNow, Inc. (NYSE:NOW) has matched the pace of revenue growth and enables the stock to deal with an economic slowdown better than the competition.
Argus analyst Joseph Bonner recently raised the price target on ServiceNow, Inc. (NYSE:NOW) stock to $800 from $760 and kept a Buy rating, underlining that the increase in enterprise spending towards IT solutions was a long-term growth catalyst for the firm. The analyst also raised the FY2022 EPS estimates by 27c to $7.27.
Hedge funds have taken a similarly bullish position on ServiceNow, Inc. (NYSE:NOW) this year. Connecticut-based investment firm Lone Pine Capital is a leading shareholder in ServiceNow, Inc. (NYSE:NOW) with 2.1 million shares worth more than $1.3 billion. At the end of September, 87 funds held stakes in ServiceNow, Inc. (NYSE:NOW) worth $7.5 billion.
In its Q1 2021 investor letter, Palm Capital, an asset management firm, highlighted a few stocks and ServiceNow, Inc. (NYSE:NOW) was one of them. Here is what the fund said:
“ServiceNow provides software solutions to structure and automate various task and processes for large businesses. The company began in 2004 with a solution to help businesses manage the IT services they offer employees and customers. Unlike the existing solutions in the market, ServiceNow’s offering was built using modern architecture that was flexible, modular, and user-friendly. And it left the incumbents – large companies such as BMC, IBM and MicroFocus – playing catch up.
As the company grew to dominate this market, it saw the opportunity to expand its offering to include the broader task of IT Operations Management – or the monitoring and control of an entire business’s IT infrastructure. And over time its success in improving productivity and user experience in IT resulted in customers asking the company to expand its offering into other business workflows including HR Management and Customer Services – which it has since done.
All ServiceNow’s applications (including those built by customers and third parties) are built on its ‘Now’ platform. This allows the company and its customers to innovate and deploy new solutions quickly. And it helps ServiceNow gather a large amount of data to gain insights into and use machine learning to build solutions to meet customer needs in other areas. Crucially, this platform can interface with other SaaS and legacy software services used by its customers. Not only does this allow an IT department to manage all the myriad software services used by a business from a single point of control, it also reduces the operational disruption risk for those transitioning from legacy software systems to the cloud.
Aside from the ease of use of ServiceNow’s offerings, the other factor driving its growth is that its ‘land and expand’ strategy starts in the IT department of customers – the very department whose task it is to recommend other software solutions for businesses. It is therefore no surprise that more than 75% of ServiceNow’s customers use more than one of its products and 80% of its new business is from existing clients.
The company now serves…”[read the entire letter here]
7. Meta Platforms, Inc. (NASDAQ:FB)
Number of Hedge Fund Holders: 248
Year-to-Date Gain in Share Price: 22%
Meta Platforms, Inc. (NASDAQ:FB) has had a whirlwind year, tackling user hacks, antitrust legislation, and rebranding in the space of a few months. It is remarkable that Meta Platforms, Inc. (NASDAQ:FB) stock has still managed to register a respectable year-to-date gain despite these issues. As part of the rebrand effort, Meta Platforms, Inc. (NASDAQ:FB) plans to spend nearly $70 billion till 2023 to pursue a multi-trillion dollar metaverse opportunity. It is one of the pioneers in this regard, although going back to the origins of Meta Platforms, Inc. (NASDAQ:FB), this should not be unfamiliar territory.
At the end of the third quarter of 2021, 248 hedge funds in the database of Insider Monkey were long Meta Platforms, Inc. (NASDAQ:FB) with stakes worth $38 billion. Fisher Asset Management is a leading shareholder in Meta Platforms, Inc. (NASDAQ:FB) with 7.5 million shares worth $2.5 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Meta Platforms, Inc. (NASDAQ:FB) was one of them. Here is what the fund said:
“We continued to keep our learnings from 2020 in mind during the quarter as we sought to increase the up capture of the portfolio. We also made adjustments to the portfolio’s top 10 holdings to increase the participation of select stocks, including Facebook, while trimming our weighting to stable names, which now represent 47% of the portfolio. Our repositioning has been encouraging so far with the portfolio performing better on up days in the market while maintaining good down capture during more turbulent sessions.”
6. JPMorgan Chase & Co. (NYSE:JPM)
Number of Hedge Fund Holders: 101
Year-to-Date Gain in Share Price: 24%
Large-cap banks like JPMorgan Chase & Co. (NYSE:JPM) have staged a comeback at the market in the latter part of 2021 as inflation rises and investors prepare their portfolios for the inevitable hike in interest rates. This environment has been given further impetus by reports that share buybacks by S&P 500 firms could hit record highs in the coming months. Analysts point to greater EPS sensitivity, loan and dividend growth, and earnings upside as some of the catalysts for large-cap banks like JPMorgan Chase & Co. (NYSE:JPM) heading into the new year.
Hedge funds with sizable stakes in JPMorgan Chase & Co. (NYSE:JPM) will benefit from the 20% potential upside in large-cap bank shares in 2022. One of these funds is Washington-based Fisher Asset Management, a leading shareholder in JPMorgan Chase & Co. (NYSE:JPM) with 7 million shares worth more than $1.1 billion.
Alongside Alphabet Inc. (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), and Apple Inc. (NASDAQ:AAPL), JPMorgan Chase & Co. (NYSE:JPM) is one of the stocks that hedge funds are buying.
In its Q4 2020 investor letter, Bretton Fund, an asset management firm, highlighted a few stocks and JPMorgan Chase & Co. (NYSE:JPM) was one of them. Here is what the fund said:
“After a strong performance in 2019, we wrote this about our bank stocks in last year’s report: “There will be another recession sooner than later, and our banks will see larger loans losses, but we think this is more than priced into the stock, and our banks are well reserved for that eventuality.” Little did we know “sooner” really meant “a few weeks from now.” Despite the economic shock, the banks still have huge capital cushions that can absorb large loan losses. Our remaining bank investments, JPMorgan and Bank of America, increased their reserves significantly at the beginning of the Covid-19 crisis in anticipation of imminent loan defaults, but with the government stimulus and perhaps a more resilient economy than many would have guessed, actual loan losses are up only slightly. They might happen later in 2021, but with an additional stimulus package and the vaccine rolling out, the large-scale losses may not be as bad as most people predicted. The bigger drag on the banks’ earnings power is lower rates, which in our opinion will persist for a long time. Despite this drag, we estimate both JPMorgan and Bank of America will continue to grow revenue and earnings over the next few years, while we believe their stocks remain bargains in a somewhat expensive market. JPMorgan’s earnings per share declined 17% last year, and its stock returned -5.5%. Bank of America’s earnings, which are more sensitive to interest rates, were down 32%, and its stock returned -11.6%.”
Click to continue reading and see Hedge Funds Were Right About These 5 Stocks in 2021.
Suggested Articles:
- Stanley Druckenmiller is Dumping These 10 Stocks
- 10 Best EV Startups to Watch
- 15 Most Valuable Aerospace Companies in the World
Disclosure. None. Hedge Funds Were Right About These 10 Stocks in 2021 is originally published on Insider Monkey.
