Hedge funds have continued to collectively underperform the market this year, posting average returns of 3%, well below the S&P 500’s 6.57% year-to-date gains. However, this does not mean that hedge funds are not good stock pickers, but rather that their riskier investments have not been performing very well. On the other hand, a Goldman Sachs study that analyzed the holdings of 826 hedge funds revealed that the 50 most popular stocks among them (the stocks most often included in each fund’s top-10 holdings) have managed to outperform the S&P 500 by roughly 500 basis points since June.
In this article we will take a look at hedge funds’ favorite stocks going into the third quarter, based on the 749 13F-filing hedge funds that we track as part of our small-cap system (more on that below). There has been a great deal of movement in the top-5 from a quarter earlier, including tech titans Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) falling out of the top-5. Read on to find out who took their place.
At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).
#5. Allergan plc Ordinary Shares (NYSE:AGN)
– Number of Hedge Funds With Long Positions (as of June 30): 131
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $13.9 billion
Allergan plc Ordinary Shares (NYSE:AGN) fell from second overall to fifth during the second quarter, as the number of hedge funds in our database long the stock fell to 131 on June 30 from 170 on March 31, which also ranked Allergan as the stock that experienced the largest flight of hedge funds. Still, their combined stakes accounted for more than 15% of the company’s shares and were valued at nearly $14 billion. Among the most bullish institutional investors was Carl Icahn’s Icahn Capital LP, which initiated a stake comprising 3.4 million shares valued at $785 million during the second quarter, likely taking advantage of the depressed stock prices, as over the first five months of the year, Allergan shares tumbled by more than 30%.
Shares have recuperated since the end of the second quarter, posting a gain of almost 10%, recently helped by the FTC’s approval of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s acquisition of Allergan plc Ordinary Shares (NYSE:AGN)’s Actavis Generic for roughly $35 billion. Allergan was upgraded to ‘Buy’ from ‘Neutral’ along with a price target that was hiked by $70 to $318 from Mizuho last Friday.
#4. Charter Communications, Inc. (NASDAQ:CHTR)
– Number of Hedge Funds With Long Positions (as of June 30): 134
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $18.4 billion
Next up is Charter Communications, Inc. (NASDAQ:CHTR), which witnessed a 36.7% increase in hedge fund support between April and June. These firms now own almost 80% of the company’s float, with Warren Buffett’s Berkshire Hathaway holding more than 8% of the outstanding shares, even after a 9% reduction to its stake, to 9.34 million shares over the second quarter. Also bullish was Stephen Mandel’s Lone Pine Capital, which disclosed ownership of 4.79 million shares of Charter Communications as of June 30.
In a recent letter to investors, Chase Coleman‘s Tiger Global Management LLC said, “Charter’s recently completed acquisition of Time Warner Cable will allow the company to implement its customer-focused strategy across Time Warner’s historically undermanaged business, resulting in meaningful improvements in revenue growth, EBITDA margins and free cash flow.” The fund also said that, based on its analysis, Charter Communications, Inc. (NASDAQ:CHTR) could double in value “in the next three to four years.” Shares of Charter Communications are up by more than 11% year-to-date, with all of those gains having been realized since the end of the second quarter.
Head to the next page to uncover hedge funds’ three favorite stocks for the summer quarter.
#3. Amazon.com, Inc. (NASDAQ:AMZN)
– Number of Hedge Funds With Long Positions (as of June 30): 145
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $19.8 billion
Amazon.com, Inc. (NASDAQ:AMZN) finally made it to the podium, with 145 funds in our database long its stock on June 30, up from 133 on March 31. Among them, Andreas Halvorsen’s Viking Global was king, with 2.37 million shares valued at $2.34 billion as of June 30. Also bullish were Ken Fisher’s Fisher Asset Management and Alex Snow’s Lansdowne Partners, with almost $1.5 billion in stock each.
Amazon.com, Inc. (NASDAQ:AMZN) has managed to outperform major stock indexes in 2016, posting returns of more than 12.3%, versus the Nasdaq’s 4.7% surge. Earlier this month, analysts at MKM Partners reiterated a ‘Buy’ rating on the company’s shares, while boosting their price target on them to $995 from $850. The reason behind the bullishness were the company’s strong second quarter results, including EPS of $1.78 and revenue of $30.4 billion, which came in ahead of expectations of $1.11 in EPS and $29.55 billion in sales.
#2. Facebook Inc (NASDAQ:FB)
– Number of Hedge Funds With Long Positions (as of June 30): 148
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $15.2 billion
Facebook Inc (NASDAQ:FB) jumped one spot on this list, despite the number of hedge funds in our database long the stock falling by 9.7% during the second quarter. As the stock ended the second quarter almost at the same level as it started it and the value of hedgies’ holdings rose by nearly 5% during the period, we can induce that those funds that remained bullish on the social media giant boosted their exposure during the quarter. For instance, Andreas Halvorsen’s Viking Global, which started a position in the first quarter, boosted its stake by 1% in the second quarter, disclosing ownership of 20.14 million shares, or $2.3 billion in stock, as of June 30. Once again, Alex Snow’s Lansdowne Partners was amongst the most bullish funds as well, holding 5.58 million shares of Facebook after a 51% increase to its holding.
Since the third quarter started, shares of Facebook Inc (NASDAQ:FB) have gained more than 9.1%, most recently helped by a Barron’s article that made the case for the stock having more than 20% upside to come and the announcement that the iconic social media site was changing its News Feed algorithm to reduce the number of misleading headlines and clickbait shown to users.
#1. Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG)
– Number of Hedge Funds With Long Positions (as of June 30): 187
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $29.8 billion
Despite the fact that the number of hedge funds in our database long Google’s two classes of stock declined by 16.1% over the second quarter, the company still remained hedge funds’ darling, counting 187 unique hedge fund backers holding almost $30 billion in stock on June 30. Among the funds that we track, 135 were long Alphabet Inc (NASDAQ:GOOGL)’s Class A stock, while 126 were long Alphabet Inc (NASDAQ:GOOG)’s Class C stock. Among the main shareholders on June 30 was Viking Global, holding 1.79 million Class A shares worth roughly $1.26 billion and 841,255 Class C shares worth about $582 million. Another large investor was Harris Associates, which declared holding 631,571 Class A shares, and 2.18 million Class C shares as of the end of June in its latest 13F filing.
Shares of Alphabet have had a volatile year, but are ultimately up by more than 2.6% year-to-date. Moreover, since the end of the second quarter, the stock has gained almost 15%. Last week, the company announced that it was opening a 14,000-square-foot space for developers and startups in San Francisco. The idea is to provide a space for those that “lack access to the resources and network” that Alphabet has in San Francisco.
Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.