It’s important to follow the stocks hedge funds are crazy about, even though hedge funds might be overlooked by many investors, given their weak aggregate performance in the last couple of years. With the stock market at all-time highs and hitting new records almost every week, the need for returns and capital preservation and long-term gains, investors don’t seem to require the sophisticated and enhanced strategies that hedge funds rely on, and which have worked very well in the past. However, it’s foolish to assume that the current market conditions are going to persist over the long run, hence hedge funds shouldn’t be thrown out of the equation.
There are different ways in which hedge funds represent a good alternative investment. Some hedge funds, especially big players, still focus on capital preservation, so they offer downside protection, even if they underperform the market. On the other hand, smaller hedge funds are more flexible, so they can provide alpha through focusing on narrower strategies that involve sector or geographic expertise. In addition, hedge funds offer one of the most important keys to a solid portfolio: diversification. Diversification works best when there is little or no correlation between assets, so it’s a good idea to pick hedge funds that don’t correlate with the stock market.
However, despite their advantages, hedge funds also charge an arm and a leg, which not always can outstrip the benefits they provide. In addition, hedge funds have very high investment requirements, which makes them unavailable for smaller investors. This is why it’s important to follow hedge funds’ investments that they disclose publicly in their 13F filings. While this approach is not perfect and only offers a glimpse at one of many strategies that hedge funds employ, it can still be useful, as we discovered through extensive research and analysis of hedge funds’ 13F filings.
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At Insider Monkey, we follow around 700 hedge funds and other institutional investors and every quarter we compile data based on their 13F filings to identify their collective sentiment towards hundreds of stocks. This approach allows us to identify stocks that are the best suited to generate market-beating returns, as we focus on particular groups of stocks, such as small and mid-cap stocks, which we share with our premium subscribers. Our strategy that focuses on best stock picks of best performing hedge funds returned 67.4% since its inception in May 2014 and beat the S&P 500 ETF (SPY) by over 20 percentage points (see more details here). In addition, we have a monthly newsletter that focuses on activist funds and identifies their best picks to imitate that hedge fund (see more details).
As we compiled the data from the third-quarter round of 13F filings, we have identified the stocks that hedge funds are collectively most bullish on. Unsurprisingly, most of these stocks are from the tech space, with seven of the top 10 most popular stocks being from this sector, with other two being financial stocks. The tech stocks that hedge funds are most bullish on are big names like Facebook Inc (NASDAQ:FB), Microsoft Corporation (NASDAQ:MSFT), and Amazon.com, Inc. (NASDAQ:AMZN). One of the reasons for this is while the tech sector has experienced substantial growth (the S&P 500 Information Technology Index is up by 36% year-to-date), many still find these stocks undervalued. Julian Robertson mentioned this at the Delivering Alpha Conference and said that right now growth companies like Apple Inc (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) “are priced cheaper than they would have ever been in the ’60s, ’70s, and ’80s.”
Having said that, let’s take a look at five stocks hedge funds are crazy about. The stocks in question not only rank among the most popular, but have also seen a big jump in popularity between July and September.
Priceline Group Inc (NASDAQ:PCLN) saw the number of hedge funds in our database long the stock advance by eight to 83 during the third quarter. However, the total value of their holdings inched down to $7.09 billion from $7.11 billion. For the third quarter, Priceline Group Inc (NASDAQ:PCLN) posted EPS of $35.22 and revenue of $4.43 billion, beating the consensus estimates by $0.97 and $90 million, respectively. However, the company also projected EPS between $13.40 and $14.00, which was lower than the consensus estimate of $15.56. In addition, recently Argus has downgraded Priceline Group Inc (NASDAQ:PCLN)’s stock to ‘Hold’ from ‘Buy’, citing concerns that higher advertising spending signals more competition. However, Argus maintained its long-term ‘Buy’ rating on the stock.
There were 105 funds tracked by us long Comcast Corporation (NASDAQ:CMCSA) at the end of September, up from 94 funds a quarter earlier. The total value of these funds’ positions increased to $10.54 billion from $10.03 billion during the third quarter. Comcast Corporation (NASDAQ:CMCSA) is currently in the spotlight as it is one of the companies that is in discussions to buy Twenty-First Century Fox Inc (NASDAQ:FOX), with another company pursuing active talks being Walt Disney Co (NYSE:DIS). The deal would allow Comcast Corporation (NASDAQ:CMCSA) to gain some exposure to international markets (it would include UK’s satellite TV provider Sky PLC and India’s Star TV), which is a necessary step as customers are cutting the cable cord, which forces cable and media companies to pursue acquisitions and adjust their business models. Comcast Corporation (NASDAQ:CMCSA) has also launched a streaming TV service, Xfinity Instant TV, to appeal to cord cutters.
In Altaba Inc (NASDAQ:AABA), there were 121 investors with stakes worth $21.27 billion at the end of September, versus 113 funds with positions valued at $16.95 billion at the end of June. Altaba Inc (NASDAQ:AABA) has the remaining assets of former Yahoo!, whose core business was sold to Verizon Communications Inc. (NYSE:VZ) in June. The assets include a 15% stake in Alibaba Group Holding Ltd (NYSE:BABA) and a 36% position in Yahoo Japan, as well as cash and a patent portfolio. The stock is up by 33.32% since it started trading as Altaba in June and it has a total capitalization of $61 billion, which is lower than the $67 billion that its stake in Alibaba Group Holding Ltd (NYSE:BABA). The discount is due to several issues, the main of which is the concern about the tax burden that would be carried if the shares are sold. However, bullish investors consider that the discount is too big and the management is committed to making the transactions as efficient as possible in order to generate the maximum shareholder value.
On the next page, we will take a look at top two stocks that hedge funds are crazy about.
On the second spot is Alibaba Group Holding Ltd (NYSE:BABA) itself. During the third quarter, the number of hedge funds in our database long Alibaba Group Holding Ltd (NYSE:BABA) jumped by 17 to 133, while the aggregate value of their positions appreciated by 27% to $19.85 billion. Alibaba Group Holding Ltd (NYSE:BABA)’s stock has almost doubled since the beginning of the year. The Chinese behemoth has made a number of big investments, including a $2.90 billion stake in China’s top hypermarket operator, Sun Art Retail Group. Alibaba Group Holding Ltd (NYSE:BABA) has also committed $15 billion to build overseas research hubs. In November, Alibaba Group Holding Ltd (NYSE:BABA) conducted a bond offering worth $7 billion, while orders for the bonds totaled around $40 billion and analysts consider that the offering provides a benchmark for other Chinese tech companies to issue their own debt.
Microsoft Corporation (NASDAQ:MSFT) is the second most popular stock among the investors in our database, with 137 funds bullish on the stock as of the end of September, up by 13 over the quarter. These funds held $22.28 billion worth of Microsoft Corporation (NASDAQ:MSFT)’s stock heading into the fourth quarter, down by 5% compared to the end of June. On December 2, Microsoft Corporation (NASDAQ:MSFT) had its annual shareholder meeting, where CEO Satya Nadella revealed that Windows 10 is now active on 600 million devices, up from 500 million in May. Shareholder also voted for the biggest board in company’s history, which includes 14 people. Microsoft Corporation (NASDAQ:MSFT)’s stock has advanced by 35.6% since the beginning of the year as the company has reported better-than-expected results and its cloud business continues to grow. The company had set a goal to reach $20 billion in annualized revenue from its cloud products and in October it announced that it had achieved that goal ahead of the schedule.
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