The 10 Most Diversified Stocks That Hedge Funds Love

In this article we present the list of The 10 Most Diversified Stocks That Hedge Funds Love.

The Walt Disney Company (NYSE:DIS), The Procter & Gamble Company (NYSE:PG), and Danaher Corporation (NYSE:DHR) are among the most diversified stocks in the world that the smart money is investing heavily in.

While pure play stocks can be a great way to target a specific industry or capitalize on a growing trend, diversified companies offer a level of safety and stability that makes then great long-term investments. These companies tend to have long track records of success and many of them pay out generous dividends that supply investors with a stable source of passive income, making them popular additions to the portfolios of dividend investors.

These companies also tend to excel during economic downturns like the one we’re in the midst of now, given that many of them are mature value stocks whose products and services are household staples that can’t be cut from even the tightest of budgets.

Just as portfolio diversification can insulate investors from the risk of specific sectors or stocks taking big hits, so too can investing in well diversified companies help insulate investors from the risk that those specific stocks will experience big swings in value one way or the other. Given the level of uncertainty on the market right now, it’s no wonder investors are increasingly turning to diversified stocks to get them through the lean times to come.

While even value stocks have struggled in 2022, being down by 13.4% year-to-date according to Morningstar data, they’ve nonetheless outperformed the broader market and thrashed growth stocks, which are down by 36.8% this year. When the market begins to turn the corner, they’ll likewise be the quickest to regain their earlier losses, giving good short- and long-term potential.

With that in mind, we checked out the portfolios of some of the best value investors in the world to see which diversified stocks they’re betting on as the economy heads towards a recession and compiled their top picks in this article.

Our Methodology

The following diversified stocks are ranked based on hedge fund sentiment. We follow a select group of hedge funds because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.

All hedge fund data is based on the exclusive group of 895 funds tracked by Insider Monkey that filed 13Fs for the Q2 2022 reporting period.

The 10 Most Diversified Stocks That Hedge Funds Love

10. Honeywell International Inc. (NYSE:HON)

Number of Hedge Fund Shareholders: 44

 

The Walt Disney Company, The Procter & Gamble Company, and Danaher Corporation are some of the most popular diversified stocks among hedge funds. Just making the list in tenth is Honeywell International Inc. (NYSE:HON), which services the home building and aviation industries, in addition to providing software, automation, and productivity solutions for a the mining, life sciences, oil and gas, and pulp and paper industries, among others.

Honeywell’s backlog is up and the company topped earnings expectations in the second quarter, so it’s performing well despite shares being off by 17% this year. The company expects to grow its organic sales by between 5% and 7% this year. Honeywell has more than doubled its dividend payments over the past decade, and the stock currently yields a solid 2.47%.

Hedge fund ownership of Honeywell International Inc. dipped by 14% during Q2 and 33% lower than its all-time highs reached during 2018 and 2019. Ric Dillon’s Diamond Hill Capital and D E Shaw each own more than 1 million shares of HON as of June 30.

Distillate Capital sold out of its Honeywell International Inc. position last year, noting in its Q3 2021 investor letter that it preferred the value proposition offered by other stocks:

“The largest exited positions were Oracle, which outperformed significantly, and Texas Instruments and Honeywell, which were roughly flat versus the market in the quarter but were edged out for inclusion by other stocks that became even more attractively valued.”

9. General Electric Company (NYSE:GE)

Number of Hedge Fund Shareholders: 51

General Electric Company (NYSE:GE) has a wide range of segments, including a financial services division, a transportation segment that services the drilling, railroad, and marine industries, among others, as well as segments devoted to aviation, renewable energy, healthcare, oil and gas, and power. GE is set to spin off its healthcare segment in January 2023.

General Electric’s orders were up 8% in the first half of the year, including 29% in the aviation segment, but supply chain issues have weighed heavily on its ability to fulfill those orders, which has put the company’s 2022 guidance in jeopardy. GE now expects that $1 billion in projected 2022 free cash flow will be pushed out to 2023, and it may still miss its reduced 2022 FCF projections. GE pays out an $0.08 quarterly dividend which gives shares an annual yield of 0.50%.

Smart money ownership of General Electric Company peaked during the first quarter of 2021 but has fallen by 30% since, having declined for four of the past five quarters. Noam Gottesman’s GLG Partners and Edward Eisler’s Eisler Capital sold out of their GE positions during Q2.

Longleaf Partners is bullish on General Electric Company’s improved balance sheet as well as the growth potential for its primary businesses, as revealed in the fund’s Q2 2022 investor letter:

“General Electric Company – Aviation, Healthcare and Power conglomerate GE was punished in the quarter amid top-down economic fears for this collection of seemingly cyclical businesses. However, the market is not giving the company credit for the material improvements CEO Larry Culp has made in his tenure. The balance sheet today is stronger than it has been in a very long time, and each of the three primary business segments each have strong paths to increasing earnings, regardless of the economic environment. Healthcare has historically not been a cyclical business. While Aviation typically has some economic sensitivity, the business still has a strong COVID rebound tailwind that should continue even in an uncertain environment. Power is a less cyclical business, and GE maintains a steady business servicing approximately one-third of the world’s electricity. GE is another example of strong insider buying indicating management’s confidence in the business, while the company also began buying back discounted shares. GE is still on track to break the company into three separate businesses, and we believe this will help the market properly weigh the value of each core segment.”

8. 3M Company (NYSE:MMM)

Number of Hedge Fund Shareholders: 55

3M Company (NYSE:MMM) operates five segments that serve a wide range of industries. Those segments are Healthcare, Industrial, Consumer, Safety and Graphics, and Electronics and Energy. 3M has over 100 manufacturing facilities spread across more than 35 countries worldwide. Some of its most well-known consumer products include Scotch tape and Post-it notes.

One of many dividend kings that rank highly on the list of most diversified stocks, 3M pays out an annual dividend of $5.94 per share, which currently yields a hefty 5.39%. The stock currently sits at a nine-year low in part due to legal challenges that could see the company hit with billons in losses. If 3M can survive that hurdle, expect the stock to take off.

There’s been a 31% surge this year in the number of funds long 3M Company, pushing smart money ownership of the stock near its all-time highs. Ken Fisher’s Fisher Asset Management owns nearly 6.2 million MMM shares worth $802 million as of June 30, while Cliff Asness’ AQR Capital raised its stake in 3M by 18% during Q2 to 921,930 shares.

Mayar Capital bought back into 3M Company this year, explaining its decision to do so in the fund’s Q2 2022 investor letter:

“We also bought back into 3M (NYSE:MMM) as the stock reached attractive levels. We’d sold our shares in 3M last year when the price exceeded our estimated fair value, and as better opportunities to invest in presented themselves at the time. Nonetheless, we’ve always liked this business with its diversified revenues, its R&D leadership and its stable margins.”

7. Colgate-Palmolive Company (NYSE:CL)

Number of Hedge Fund Shareholders: 57

While Colgate-Palmolive Company (NYSE:CL) is best known for its eponymous oral health and soap brands, the company also sells a wide range of other products, including deodorant, shampoo, fabric softeners, and pet food.

Colgate-Palmolive grew organic sales by 9% during Q2, thanks in part to inflation driving the average price of its products up by 8.5%. Inflation negatively impacted the company’s bottom line however, as adjusted earnings fell by 10% year-over-year. The dividend king also raised its dividend payments by 4.4% during Q2, giving its shares a yield of 2.68%.

The number of hedge fund shareholders of Colgate-Palmolive Company topped 60 for the first time in the middle of 2021 and inched up by 12% during Q2 of this year. Jim Simons’ Renaissance Technologies has been a CL shareholder for several years and owns over 4.87 million shares worth $390 million as of June 30.

First Eagle Investments Global Fund, which had the largest position in Colgate-Palmolive Company among the hedge funds tracked by Insider Monkey’s database as of June 30, shared some of the reasons why it likes the stock in its Q2 2022 investor letter:

“Shares of consumer staples giant Colgate-Palmolive have performed well as investors rotated into more recessionary-resilient defensive stocks amid the broader selloff during the second quarter. The company raised revenue guidance for 2022 but lowered its margin outlook because of higher costs for raw materials, packaging and logistics; we believe that the company’s size and market share provide it with options to mitigate the inflation challenges it faces. We continue to like Colgate- Palmolive’s dividend and previously announced $5 billion stock buyback program.”

6. The Coca-Cola Company (NYSE:KO)

Number of Hedge Fund Shareholders: 61

While The Coca-Cola Company (NYSE:KO) is primarily a beverage giant, it does have a diverse collection of products, including its eponymous soda, as well as Minute Maid, Powerade, Fanta, Sprite, and Dasani, among others. Coca-Cola is also expanding into flavored alcoholic beverages. In certain regions, Coca-Cola also produces and/or distributes several brands that aren’t owned by the company, including Monster Energy, Nestea, and some of Dr. Pepper Snapple’s brands.

Coca-Cola grew organic sales by 16% during Q2, while earnings rose by 4% in a challenging environment. The company expects to generate $10.5 billion in free cash flow, with some of that windfall finding its way back to investors in the form of dividend payments, which currently yield 3.14%. The company is also closing in on 60 consecutive years of raising its annual dividend payments.

Hedge fund ownership of The Coca-Cola Company hit a multi-year high at the end of 2021, but has dipped by 15% this year. Investing legend Warren Buffett remains KO’s staunchest supporter, owning an even 400 million shares worth over $25 billion as of June 30. Buffett has owned a stake in the company since 1988.

The ClearBridge Investments Dividend Strategy bought more shares of The Coca-Cola Company and other defensive stocks heading into a turbulent 2022, as outlined in the fund’s Q4 2021 investor letter:

“Over the last year, we have repositioned our portfolio to navigate the course we see ahead. We added to more defensive areas of the portfolio like consumer staples (Coca-Cola). While the next month or two will likely prove choppy on account of the Omicron variant, we believe that Omicron, like Delta, represents a speed bump on the way to recovery rather than a true change in course. We see strong economic momentum continuing in 2022 and we expect interest rates to rise. After a decade of remarkably low rates, we would not be surprised if this change in direction is accompanied by some fits and starts in the markets. With our emphasis on pricing power, purposeful sector exposure, valuation discipline, and a strong dividend profile, we believe we are well-positioned for the year ahead.”

The Walt Disney Company, The Procter & Gamble Company, and Danaher Corporation are some of the favorite diversified companies among hedge funds. Check out where they rank in the second part of this article, linked to below.

5. The Procter & Gamble Company (NYSE:PG)

Number of Hedge Fund Shareholders: 72

Kicking off the second half of the list is The Procter & Gamble Company, the consumer goods giant that boasts many of the most recognizable brands found on store shelves. Olay, Gillette, Old Spice, Crest, Mr. Clean, Febreze, Tampax, and Dawn are just a small collection of the company’s brands, which span everything from grooming and baby care, to healthcare and beauty.

Procter & Gamble is a cash flow generating juggernaut, converting 93% of its earnings into FCF over the previous year and allocating boatloads of that cash towards shareholder returns in the form of buybacks and dividends. On the latter front, PG shares currently yield 2.89%. P&G grew sales by 5% during its fiscal year 2022 to $80 billion.

Hedge funds have largely been maintaining their positions in The Procter & Gamble Company for the past several quarters following a 12% drop in ownership of PG during the first quarter of 2021. Ray Dalio’s Bridgewater Associates and Rajiv Jain’s GQG Partners both sold off some of their PG shares during Q2, but maintain positions valued at over $800 million as of June 30.

4. Danaher Corporation (NYSE:DHR)

Number of Hedge Fund Shareholders: 83

Danaher Corporation has four segments that supply products and services across a range of diverse industries, including the medical and life sciences fields, water and environmental protection, and dental care.

While Covid-19 proved to be a boon for the company, its non-Covid vaccine/therapies revenue is also growing at a double-digit rate. The majority of Danaher’s revenue is recurring, which should insulate the company from the effects of a recession. Danaher is expected to generate $7.15 billion in revenue during Q3.

Hedge fund ownership of Danaher Corporation soared between the end of 2018 and the end of 2021, rising by 78% while the stock tripled in value. There’s been a slight dip in the number of funds long DHR this year and the stock is off 18% in 2022. Ken Fisher’s Fisher Asset Management and Dan Loeb’s Third Point own large stakes in Danaher as of June 30.

The Weitz Investment Partners III Opportunity Fund built a new stake in Danaher Corporation during Q2 and praised the company’s free cash flow and strong track record of successful acquisitions in the fund’s Q2 2022 investor letter:

“Consistent with that approach, portfolio activity among our long holdings tilted toward purchases. We added to almost half our holdings by varying degrees, and we were pleased to initiate new positions in Danaher. Danaher is a provider of instruments and diagnostic tools to medical, life science, and other desirable end-markets worldwide. The business generate significant free cash flow, possess strong competitive positions, and have excellent management teams with demonstrated acquisition records.”

3. The Walt Disney Company (NYSE:DIS)

Number of Hedge Fund Shareholders: 111

The Walt Disney Company owns a host of iconic entertainment characters, brands and media networks, operates the leading streaming service in the world, Disney+, and manages a stable of popular theme parks and resorts. It also stages various live performances of its content in the form of Broadway plays, and licenses merchandise of its popular brands.

Bank of America analyst Jessica Reif Ehrlich has a ‘Buy’ rating and $127 price target on Disney, down from $144 previously. The analyst projects Disney to pull in $21.7 billion in fiscal Q4 revenue, down slightly from previous projections due in part to revised Disney+ subscriber adds, which are now expected to come in at 8 million, down from previous forecasts of 15 million.

The Walt Disney Company remains one of the most popular stocks among hedge funds, but there has been somewhat of an exodus from the stock in recent quarters, with a net 38% decline in hedge fund ownership since the end of 2020. Jim Simons’ Renaissance Technologies and David Tepper’s Appaloosa Management both initiated stakes in DIS during Q2.

Oakmark Fund was buying up shares of The Walt Disney Company during Q2, revealing that they’re substantially discounted to the fund’s intrinsic value estimates for the stock, as laid out in its Q2 2022 investor letter:

“Disney is one of the most beloved consumer companies in the world. Its media business has a rich library of intellectual property, which provides a powerful engine for creating new content across the Disney, Pixar, Marvel, and Star Wars brands. This content also contributes to the success of Disney’s theme parks, which generated nearly half the company’s earnings and grew more than 10% annually in the decade prior to the pandemic. Shares have fallen nearly 50% over the past year as investors worried about the company’s ability to transition its media business to a direct-to-consumer streaming world. This transition has required management to make investments in its Disney+ streaming service that are depressing profitability today. However, we believe these investments will ultimately produce attractive returns as Disney+ continues to grow subscribers and increase pricing over time. As a result, we were able to purchase shares at a substantial discount to our estimate of intrinsic value.”

2. Berkshire Hathaway Inc. (NYSE:BRK-A)

Number of Hedge Fund Shareholders: 141

Berkshire Hathaway Inc. (NYSE:BRK-A) is one of the most diversified companies on the planet, owning dozens of varied businesses that include insurance, manufacturing, energy, retail, and railroad companies. Then there’s the holding company’s iconic hedge fund operations, which had $300 billion in 13F securities on June 30, being invested heavily in the tech, finance, and consumer staples industries.

The company’s investment portfolio did take a massive hit during Q2 given the state of the bear market, which led to a $44 billion net loss for the company. Short-term investment performance isn’t a good way to measure the company however. More importantly, Berkshire pulled in $76.2 billion in revenue and recorded an operating profit of over $11 billion.

Shares of Warren Buffett’s holding company Berkshire Hathaway Inc. are among the ten most popular among hedge funds. Michael Larson’s Bill & Melinda Gates Foundation Trust, which receives an annual gift of BRK-A shares donated by Mr. Buffett, is the largest shareholder of the holding company, owning 34.7 million shares worth $9.47 billion as of June 30.

The Diamond Hill Large Cap Fund discussed the latest happenings regarding its Berkshire Hathaway Inc. investment in the fund’s Q1 2022 investor letter:

“Diversified holding company Berkshire Hathaway reported strong earnings during the quarter and benefited from continued share repurchases below intrinsic value. The company also announced significant deployments of excess cash during the quarter, including the acquisition of Alleghany and a large increase in its stake in Occidental Petroleum.”

1. Amazon.com, Inc. (NASDAQ:AMZN)

Number of Hedge Fund Shareholders: 254

Amazon.com, Inc. (NASDAQ:AMZN) has expanded far from its e-commerce roots to become one of the most diversified companies in the world. The company now has its hands in everything from online streaming, book publishing, and cloud services, to electronic devices, co-branded credit cards, and advertising.

Amazon’s advertising business was one of the company’s strongest performers during a difficult Q2, growing by 18%. Amazon’s Web Services also continues to grow at a rapid pace in the burgeoning cloud computing market, growing by 33% year-over-year in Q2. Amazon is expected to surge its revenue by 15.5% to nearly $128 billion.

Amazon.com, Inc. is the second-most popular individual stock among hedge funds even after ownership of the stock dipped by 10% over the past two quarters. Some of Amazon’s biggest bulls loaded up on shares during the stock’s Q2 weakness, with Ken Fisher’s Fisher Asset Management growing its stake by 1,959% to 48.6 million shares during the quarter, while Jaime Sterne’s Skye Global Management raised its position by 1,982% to 15.4 million shares.

Lakehouse Capital discussed Amazon.com, Inc.’s resilient Q2 in the face of various headwinds, as well as the company’s long-term growth outlook in the fund’s July 2022 investor letter:

“Amazon.com, Inc. proved resilient in the face of ongoing macro pressures and delivered a strong quarterly result along with “better-than-feared” guidance for the third quarter. Net sales increased 7% year-on-year (10% constant currency) to $121.2 billion, while operating profit declined 57% to $3.3 billion. The drop in operating profit was attributable not only to external macro factors, such as elevated shipping and fuel costs, but also lower productivity and efficiency costs as a result of some overcapacity on the back of its recent investment cycle. It was pleasing to see that the company has begun to make progress on the more controllable costs, particularly productivity and staffing, with headcount, for example, down almost 100,000 over the quarter. We continue to believe Amazon is well positioned to manage these short-term issues and remains on track to deliver significant profit improvements over the next twelve months.

Management also confirmed that they have not seen any deterioration in Prime membership growth or retention following the 17% increase in Prime fees put through earlier in the year. This is not surprising to us, as in our view, the price increase was more than justified given the tremendous amount of customer value that has been added since the last price increase was implemented back in 2018, which includes the doubling of its fulfilment network and workforce, significant expansion of free same-day delivery and considerable investments in video and music content. Ultimately, we remain positive about Amazon’s future and believe that the company’s scale and market leadership will continue to drive growth for many years to come.”

For more of the latest stock picks worth considering for your portfolio, check out the Best Bitcoin Stocks To Buy and the Best Airline Stocks To Buy.

 
 

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This article is originally published at Insider Monkey.