Want a good stock tip? You could do worse than asking a hedge fund manager.
OK, these guys don’t always get it right. Last year, for example, the average hedge fund gained just 11%, under-performing the S&P 500’s stellar 23% jump. But Goldman Sachs, which compiles the “VIP List” of the top 50 hedge-fund holdings every quarter, says the following 10 most popular stocks has outperformed the S&P 500 by an average of 68 basis points each quarter since 2001.
So let’s take a peek inside the hedge funds’ portfolios, and see what Goldman says their top 10 most popular stocks are…
10. Microsoft (MSFT)
Ah, 1999. Do you remember it? A cool new film called The Matrix was wowing us in cinemas, Mambo No 5 was playing on the radio, Justin Bieber was just starting first grade, and Microsoft was a hot tech stock zipping up to the dizzy heights of $36 a share.
Fast-forward 15 years, and while the rest of the world has changed dramatically, Microsoft is still trading at $36 a share. Hedge funds appear to believe that the years of flatlining are about to come to an end, however, because 49 of them own Microsoft stock, and 25 have it as a major holding in their portfolios. Some analysts believe Microsoft is positioning itself well to compete for share of the growing smartphone and tablet markets.
As a side note, Microsoft only slipped into the top 10 by default. The original #10 was an Irish biotech firm, Elan Corp., which has since been bought out and is no longer publicly traded. The Goldman Sachs figures are based on SEC filings, so there’s a lag of a few months. In Elan’s case, hedge funds were clearly mopping up the last few gains in stock price before the sale completed.
9. Hertz Global Holdings (HTZ)
Higher car-rental prices may be bad for you and me, but they’re great for companies like Hertz. Barron’s suggests that Hertz stock could rise almost 70% in the next few years based on its earnings forecasts. Hedge funds have been piling in, and legendary investor Carl Icahn also picked up 30 to 40 million shares recently.
8. Charter Communications (CHTR)
Loss-making cable and satellite company Charter Communications doesn’t seem like an obvious buy target, but cable industry pioneer John Malone took a big stake last year, convinced by Charter’s market position and growth prospects, and hedge funds must have been impressed too. Charter CEO Tom Rutledge is renowned as a dealmaker, and recently lived up to that reputation by lodging an audacious $61 billion takeover bid for larger rival Time Warner Cable.
7. Priceline.com (PCLN)
Maybe some of those hedge fund guys got a good deal on Priceline.com. Or maybe they just like William Shatner. In any case, they certainly love this stock, with 42 funds holding it, and 29 taking major positions.
Priceline has been a growth machine for a decade now, and consistently beats Wall Street earnings estimates. Investors have had a good run in the past three years, with the stock climbing from $200 to over $1,000, and hedge funds are betting that the good times will continue to roll.
6. Facebook (FB)
With the debacle of its IPO now firmly behind it, Facebook looks a good bet. Its shares have doubled since last summer, buoyed by strong earnings reports and growth forecasts. Some doubt that the newfound enthusiasm is justified, but hedge funds are holding plenty of stock – or at least they were a few months ago, when they made the SEC filings on which Goldman’s rankings are based. Some may well have taken profits during the recent run-up.
5. Citigroup (C)
Citigroup is one of the few companies to be envious of Microsoft’s stock performance over the past decade. Its shareholders would have loved a decade of flatlining, instead of the catastrophe of the subprime crisis that wiped out 90% of its value. The banking giant has recovered steadily since then, though, and some investors think it’s underpriced given its strong balance sheet and earnings growth. This Seeking Alpha article sees a potential 50% upside.
4. General Motors (GM)
GM fared even worse than Citigroup in the downturn of 2008, suffering heavy losses and eventually filing for bankruptcy in June 2009. It’s also recovered well, though, cleaning up its balance sheet and posting 15 consecutive profitable quarters. Earlier this month it felt confident enough to pay its first dividend since bankruptcy, and most Wall Street analysts rate it a Strong Buy.
3. Google (GOOG)
Google just keeps on growing. Its shares have soared above the $1,000 mark, but with earnings growing at an impressive 34% clip, debt extremely low and forecasts bullish, it’s hard to bet against continued growth. Deutsche Bank recently called Google a must-have stock, and 90 hedge funds agree with that assessment.
2. Apple (AAPL)
The trifecta! With Facebook, Google and Apple in the top 6, and Microsoft slipping in at number 10, hedge funds’ portfolios are looking a lot like those of a newbie investor who decided to follow Warren Buffett’s advice of “Invest in what you know.” What will the #1 stock be? Twitter?
1. American International Group (AIG)
After all those tech giants, it may come as a surprise to learn that hedge funds’ favorite stock is insurance company AIG. Take a closer look, though, and it’s easy to see the attraction. Another company that tanked in 2008, AIG is now looking attractive to value investors, because although it’s in much better shape than it was a few years ago, it’s still priced substantially below the book value of its assets. Hedge funds are impressed, with 89 funds holding AIG stock and 64 making it a top 10 holding. Overall, hedge funds own 12% of AIG shares.
Do you own any of these stocks? Would you follow hedge funds’ investing strategies, or avoid them? Let me know in the comments!