Hedge funds frequently fail to live up to their billing as the "smart money," but they're certainly earning that sobriquet so far in 2021.
The Eurekahedge North American Hedge Fund Index is up 4.8% for the year-to-date through March 8, leading all three major U.S. equity indices by a comfortable margin. Given that so many of hedge funds' favorite names are members of the Dow Jones Industrial Average (.DJI), one would figure that the smart money is being aided at least in part by the blue-chip barometer's relative outperformance this year.
Indeed, the Dow was up 3.9% for the year-to-date as of March 8, easily outpacing the S&P 500's (.SPX) rise of 1.7% and the Nasdaq Composite's (.IXIC) 2.2% loss.
True, big blue-chip stocks are always over-represented on a list of hedge funds' favorite picks. That's partly a function of their massive market capitalizations and attendant liquidity, which creates ample room for institutional investors to build or sell large positions.
Be that as it may, there are only 30 stocks in the Dow, and yet they account for more than half of the hedge funds' 25 most popular holdings. Two former Dow Jones stocks also make the list of hedge fund favorites.
Since it's always interesting to see what hedge funds are up to, and much of the Dow appears to be benefiting from a general rotation toward more value-oriented names, it seemed like a good time to catch up on the smart money's favorite bets.
So have a look at hedge funds' 25 favorite blue-chip stocks to buy now. All these names likely appeal to elite funds because of their size, strong track records or outsized growth prospects, but we'll delve into a few specifics that make each pick special.
Share prices and other data are as of March 8, unless otherwise. Companies are listed in reverse order of popularity with hedge funds, according to WhaleWisdom. Analysts' ratings and other data provided S&P Global Market Intelligence, unless otherwise noted.
- Market value: $207.2 billion
- Dividend yield: N/A
- Analysts' recommendations: 12 Strong Buy, 8 Buy, 7 Hold, 0 Sell, 0 Strong Sell
Adobe (ADBE) is the undisputed leader in making software for designers and other creative types. Its software arsenal includes Photoshop, Premiere Pro for video editing and Dreamweaver for website design, among many others.
Adobe's dominant position in its field is partly why hedge funds love the stock, and analysts like it too.
"As a result of its early-mover position and strategic mergers & acquisitions, Adobe has established itself as the unchallenged leader in creative software for both the enterprise and consumer markets," says Stifel (Buy), which recently transferred coverage of the name from analyst Tom Roderick to Parker Lane. "We view Adobe as one of the most compelling investment cases in our coverage areas."
Stifel is hardly alone in its ardor for Adobe. Note that of the 27 analysts covering the stock tracked by S&P Global Market Intelligence, 12 rate shares at Strong Buy and eight say Buy.
Argus Research analyst Joseph Bonner, who rates shares at Buy, echoes Stifel's bullish thoughts on the name, emphasizing Adobe's unequaled position in the "center of the exploding market for digital video content and advertising creation and management."
At Baird equity research, analyst Rob Oliver rates ADBE at Outperform (equivalent of Buy), saying the company's "unique" growth and margin profile makes it "attractive for large-cap investors looking for exposure to global digital transformation."
With projected average annual earnings growth of 15% over the next three to five years, it's easy to see why ADBE is on the list of hedge funds' favorite blue-chip stocks.
- Market value: $364.6 billion
- Dividend yield: 1.7%
- Analysts' recommendations: 18 Strong Buy, 10 Buy, 8 Hold, 2 Sell, 0 Strong Sell
Analysts consider Walmart (WMT) to be one of the best Dow Jones stocks, and hedge funds concur.
The world's largest retailer has spent years making heavy investments in its e-commerce business to counter Amazon.com's (AMZN) strategic threat. Little did Walmart know that a global pandemic would more than justify that initiative.
As a one-stop shop for all manner of goods, and consumer staples in particular, the discount chain has been thriving in a world of social distancing and high unemployment. U.S. e-commerce sales grew 79% in the quarter ended Oct. 31, alone.
Success in e-commerce has done wonders for investor sentiment. Consider that not too long ago the market worried endlessly about Walmart becoming a brick-and-mortar dinosaur. Now, it's the (albeit distant) second largest e-commerce retailer in the country.
BofA Global Research analyst Robert Ohmes cites the benefits of having both a physical and online presence as part of the reasoning behind his Buy recommendation on Walmart stock.
"WMT's omni-channel transformation in the U.S. will continue to gain momentum and support more sustainable and predictable positive same-store sales and traffic at U.S. Supercenters and in U.S. e-commerce," Ohmes writes in a note to clients.
- Market value: $247.6 billion
- Dividend yield: 2.3%
- Analysts' recommendations: 8 Strong Buy, 5 Buy, 17 Hold, 7 Sell, 3 Strong Sell
Intel (INTC) has fallen far behind the competition on any number of fronts. That explains why analysts and investors were so happy when the chipmaker said it hired Pat Gelsinger, former CEO of VMWare (VMW), to take over in February.
"We think the recent CEO hire of Pat Gelsinger is the best decision the company has made in over a decade," says CFRA's Angelo Zino, who rates shares at Hold. "While a CEO change doesn't solve INTC's problems, we give it a better chance to succeed."
Be that as it may, the new chief has his work very much cut out for him.
"Our biggest concern for INTC has been the recent and potential market share loss within the Data Center space," Zino says. "Mr. Gelsinger's ties in this arena will undoubtedly help it put up a better fight."
Although the transition to working-from-home has given the chipmaker a lift, customer spending is expected to moderate in the months ahead, notes Wedbush's Matt Bryson, who rates INTC at Underperform (Sell). Demand for personal computers should also tail off.
"While eventually Mr. Gelsinger's hiring could turn INTC's execution around, any shift will almost be prolonged and success is not a certainty," Bryson says.
Sell calls are rare on Wall Street, and certainly among the Dow 30 stocks, but INTC has a total of 10 of them: seven Sell ratings and three Strong Sell ratings. Seventeen analysts say shares are a Hold, five call them a Buy and eight say Strong Buy.
But so far, hedge funds that saw the value in this blue chip have been rewarded, with INTC shares up more than 20% as of early March.
- Market value: $192.1 billion
- Dividend yield: 4.5%
- Analysts' recommendations: 6 Strong Buy, 1 Buy, 15 Hold, 0 Sell, 0 Strong Sell
Pharmaceutical giant Pfizer (PFE) was removed from the Dow Jones Industrial Average in 2020, but it remains a go-to name for large institutional investors. After all, it's a classic defensive dividend stock with ample liquidity and a huge market value that gives it outsized influence on the healthcare sector.
And should anyone doubt it's continued relevance, look no farther than the accolades it's collecting for its efforts in the fight against the novel coronavirus.
"We continue to think Pfizer-BioNTech's mRNA-based vaccine against COVID-19 is a history making success story, and it can be quickly upgraded," says CFRA analyst Sel Hardy, who rates PFE at Buy. "Vaccine sales will be the top contributor to Pfizer's top-line growth in 2021."
As much as hedge funds embrace PFE these days, analysts as a group actually tend to be cautious on the name. Although their average recommendation comes to Buy, a plurality of 15 analysts rate the stock at Hold. Six have it at Strong Buy and one says Buy.
Their average price target, however, shades a bit more optimistic. At $41.04, analysts give shares implied upside of nearly 20% over the next year or so.
For the record, shares in the pharma company are essentially flat over the past six months.
- Market value: $298.2 billion
- Dividend yield: 0.1%
- Analysts' recommendations: 19 Strong Buy, 10 Buy, 7 Hold, 2 Sell, 0 Strong Sell
Chipmaker Nvidia (NVDA) is a no-brainer for hedge funds because it has exposure to a number of different growth trends.
For example, it has a huge presence in computer gaming, artificial intelligence (AI), data servers, supercomputers, mobile chips and cryptocurrency mining. To further those ends, Nvidia in 2020 inked a deal to buy chipmaker Arm Holdings from SoftBank (SFTBY) for $40 billion.
Recent objections to the deal by some of the world's largest tech firms have thrown completion of the merger in doubt. Regardless, analysts remain bullish on the name, given the company's strength in so many emerging technologies.
"We recommend establishing or adding to positions in this preeminent vehicle for participation in the AI economy," says Argus Research analyst James Kelleher. "We believe that most technology investors should own NVDA in the age of deep learning, AI, and graphics-processor-unit-driven applications acceleration."
Wall Street expects NVDA to generate average annual earnings growth of more than 18% over the next three to five years, according to S&P Global Market Intelligence.
- Market value: $235.4 billion
- Dividend yield: 4.4%
- Analysts' recommendations: 4 Strong Buy, 4 Buy, 19 Hold, 0 Sell, 0 Strong Sell Hedge funds are bigger fans of Verizon (VZ) than analysts these days, but let's not make too much of it.
The Street's average recommendation comes to Hold, according to S&P Global Market Intelligence, even as VZ ranks as the 20th most popular hedge fund holding.
Hedge funds appear more bullish than the Street on the Dow's sole telecommunications stock, however, because of the peculiarities of S&P Global Market's rating system. A single downgrade to Hold from Strong Buy in the past month tipped VZ into consensus Hold territory – even though not much else has changed.
As for the investment thesis that makes VZ so attractive to hedge funds, bulls point to the rollout of 5G networking and Verizon's defensive franchise.
"With a safe dividend yield and low leverage, we believe the market favors Verizon's 5G strategy and simpler story," says Raymond James analyst Frank Louthan IV (Outperform). "Whether we are in an expansion or a contraction, consumers' internet and mobile plans may be the last thing they're willing to give up when times get tough."
Bears are less charitable when it comes to Verizon's 5G plans, and they worry about increased competition following Sprint's merger with T-Mobile (TMUS).
"Verizon's heavy reliance on millimeter wave spectrum for its 5G network is a poor strategy," says CFRA's Keith Snyder.
Perhaps the most interesting newly minted bull is Warren Buffett, CEO and Chairman of Berkshire Hathaway (BRK/B). The holding company initiated a position in Verizon in the fourth quarter of 2020, picking up 146.7 million shares currently worth around $8 billion.
19. Bank of America
- Market value: $316.9 billion
- Dividend yield: 1.9%
- Analysts' recommendations: 11 Strong Buy, 6 Buy, 8 Hold, 1 Sell, 1 Strong Sell
Bank of America (BAC) is popular with hedge funds for the same reason as other money center bank stocks with huge market values and rivers of liquidity. It offers a bet on both domestic and international growth trends.
It's also a bet on the increasing digitization of banking for retail and enterprise customers, notes Piper Sandler's Jeffery Harte.
"While the low interest rate environment creates meaningful revenue headwinds in consumer banking, we believe BAC will be a leading beneficiary of the pandemic-driven acceleration toward digital banking and reiterate our Overweight rating," he says.
The analyst adds that "BAC remains relatively asset sensitive at a time when rising long-term interest rates suggest that the market finally sees some 'light at the end of the tunnel' for near zero interest rates."
Importantly, BofA has scale at a time when it matters more than ever before in the banking industry, Harte says.
Deutsche Bank's Matt O'Connor notes that BAC, which he rates at Buy, is one of his top picks among U.S. bank stocks.
One big-time investor who continues to believe fully in Bank of America is Warren Buffett. Berkshire Hathaway's stake in BAC accounts for 11.4% of the holding company's total portfolio value. At the same time, Berkshire is Bank of America's largest shareholder, at 11.7% of its shares outstanding.
That's a remarkable vote of confidence considering how Buffett has taken a scythe to most of Berkshire's positions in other banks.
- Market value: $627.5 billion
- Dividend yield: N/A
- Analysts' recommendations: 37 Strong Buy, 10 Buy, 2 Hold, 0 Sell, 0 Strong Sell
Alibaba (BABA) is sometimes called the Amazon of China, and although there are important differences between the two, they do share the enviable trait of being undisputed titans in e-commerce.
Another key trait they share is that just like Amazon, Alibaba has never shied away from investing heavily in itself to both build out its existing businesses and enter new ones. And so, BABA also finds itself spreading its tentacles far beyond its core e-commerce business into cloud computing, digital payments and much, much more.
Analysts who are bullish on Alibaba point to its history of innovation and ceaseless drive to enter new businesses.
"Alibaba's new retail initiatives combine online and offline assets and leverage data and technology to transform traditional retail," writes UBS Global Research analyst Jerry Liu, who rates the stock at Buy. "In addition to its advertising- and commission-based e-commerce platforms, Alibaba offers logistics, media content and cloud computing platforms and payments through affiliate Ant Financial."
Even more ambitiously, BABA is building an electronic world trading platform (eWTP), aiming to serve 2 billion customers by 2036, Liu notes.
Hedge funds can take heart in the fact that Wall Street is extremely bullish on the stock. Of the analysts surveyed by S&P Global Market Intelligence, 37 have a recommendation of Strong Buy on the name. Another 10 say Buy, while two have it at Hold.
The Street expects Alibaba to generate average annual earnings growth of more than 20% over the next three to five years, according to S&P Global Market Intelligence. With shares trading at less than 20 times next year's projected earnings, hedge funds can say that BABA looks like quite a bargain.
- Market value: $188.9 billion
- Dividend yield: 4.9%
- Analysts' recommendations: 11 Strong Buy, 6 Buy, 6 Hold, 0 Sell, 0 Strong Sell
AbbVie (ABBV) is best known for blockbuster drugs such as Humira, a rheumatoid arthritis drug on pace to surpass Lipitor as the best-selling drug of all time. However, hedge funds are increasingly excited about what's in the pharma company's pipeline.
They also cotton to the company's decades of uninterrupted dividend growth, which is now approaching a half of a century.
As for ABBV's pipeline, analysts are optimistic about the potential for Rinvoq and Skyrizi, which treat rheumatoid arthritis and plaque psoriasis. Indeed, recently released Q4 results were a pleasant shock for UBS analysts, who said, "We are surprised to the upside by the magnitude of beats for key growth drivers Skyrizi and Rinvoq."
But another draw for hedge funds and other investors is the biopharma firm's storied dividend history.
AbbVie is a Dividend Aristocrat, by virtue of having raised its dividend every year for 49 years. Moreover, the company has improved its payouts at a rapid 18% over the past five years.
And there's always something comforting about having the imprimatur of the Oracle of Omaha. Warren Buffett's Berkshire Hathaway initiated a position in Q3 of 2020 and upped its stake considerably in Q4.
16. UnitedHealth Group
- Market value: $329.9 billion
- Dividend yield: 1.4%
- Analysts' recommendations: 14 Strong Buy, 6 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Large institutional investors looking to make big bets in the health insurance sector can't avoid the gravitational pull of Dow component UnitedHealth Group (UNH). With a market value of nearly $330 billion and a 2021 sales forecast of $279.2 billion, this blue-chip stock is the largest publicly traded health insurer by a wide margin.
UnitedHealth's girth stems from a long history of mergers and acquisitions and stock-price outperformance. In the past five years alone, UNH shares delivered an annual average total return (price appreciation plus dividends) of 23.5%, according to Morningstar. The broad U.S. stock market generated a total return of 16.6% over the same span.
The road ahead looks promising, too, as UNH ramps up its health insurance exchange operations, enjoys strong contributions from its Optum division, and maintains a healthy appetite for acquisitions.
Indeed, CFRA Research was prompted to upgrade the name in mid-January following yet another big UnitedHealth deal.
"We raise our view on UNH to Strong Buy from Buy following the company's recent decision to acquire Change Healthcare Inc., a major health care technology company, for $13 billion consideration," wrote analyst Sel Hardy at the time.
Analysts' long-term growth forecast stands at almost 15% for the next three to five years. Meanwhile, their average price target of $396.74 gives UNH's stock implied upside of about 13% in the next 12 months or so, according to data from S&P Global Market Intelligence.
15. Procter & Gamble
- Market value: $314.0 billion
- Dividend yield: 2.5%
- Analysts' recommendations: 8 Strong Buy, 4 Buy, 10 Hold, 1 Sell, 0 Strong Sell
Consumer staples stocks such as mega-cap Procter & Gamble (PG) were early winners from the pandemic and rolling lockdowns. People will always need products such as P&G's Charmin toilet paper, Head & Shoulders shampoo and Crest toothpaste.
And although some analysts worry about increasingly difficult year-over-year comparisons coming up, hedge funds are sticking by the name.
The stock's defensive characteristics, massive market value, liquidity and Dow pedigree no doubt contribute to its popularity with fund managers. Annual dividend increases that come like clockwork only add to the name's appeal. After all, P&G has paid shareholders a dividend since 1890, and it has raised its payout annually for 64 years in a row.
That's not to say hedge funds like PG stock at just any old price. And we might find they've come to share some of the Street's concerns about adding to or initiating positions at current levels.
For example, Stifel analyst Mark Astrachan in late January downgraded PG to Hold from Buy, arguing that Procter & Gamble's share price has yet to account for lapping last year's pandemic-fueled strength.
"Our Hold rating reflects less expected relative outperformance as comparisons become increasingly difficult, including downside risk from slower sales growth and higher input costs," writes Astrachan in a note to clients.
Analysts on average forecast the company to generate average annual earnings growth of 7% over the next three to five years, according to S&P Global Market Intelligence. Their average target price of $151.14 gives shares implied upside of about 19% in the next year or so.
14. Home Depot
- Market value: $279.8 billion
- Dividend yield: 2.6%
- Analysts' recommendations: 15 Strong Buy, 9 Buy, 8 Hold, 1 Sell, 0 Strong Sell
Dow component Home Depot (HD), the nation's largest home improvement chain, has long been a way for hedge funds and others to play the housing market.
Turns out, HD also is a good way to play COVID-19.
A country basically cooped up at home has been great for business. Argus Research's Christopher Graja, who rates shares at Buy, does as a good a job as anyone in summarizing the bulls' case on Home Depot stock:
"We believe that sheltering-at-home has given consumers the time and inclination to take on small home improvement projects. HD is a potential beneficiary if consumers continue to reallocate a portion of their spending from traveling and eating out to working, relaxing and studying in a safe comfortable home and yard. HD could also be a beneficiary of greater attention to cleaning and disinfecting."
On a more cautious note, Wedbush equity research analyst Seth Basham rates the stock at Neutral (Hold), writing that although HD's tailwind of COVID-19 sales growth is persisting, so too are most of the company's cost headwinds.
Overall, analysts' consensus forecast calls for average annual earnings growth of 9.5% over the next three to five years. And as for valuation, at less than 20 times expected earnings, HD trades at a slight discount to S&P 500. That's a refreshing thing to see in a pricey market.
With its massive market capitalization, this blue-chip stock is a no-brainer not just for hedge funds, but a wide range of institutional investors.
- Market value: $188.8 billion
- Dividend yield: 3.5%
- Analysts' recommendations: 13 Strong Buy, 5 Buy, 5 Hold, 0 Sell, 0 Strong Sell
Yet another member of the Dow Jones Industrial Average, pharma giant Merck (MRK) has the huge market value and related liquidity – as well as the blue-chip prestige and track record – to be an obvious stock pick for any large institutional investors.
It also doesn't hurt that Merck has a bunch of blockbuster drugs on its hands.
Cancer drug Keytruda is a runaway best-seller, having been approved for advanced melanoma, non-small-cell lung cancer, head and neck cancer, classical Hodgkin's lymphoma and bladder cancer. Bulls also point to strength in Januvia for diabetes, as well as Gardasil, a human papillomavirus (HPV) vaccine.
Although the cancellation of elective procedures amid the pandemic remains an issue, business is coming back, notes Argus Research analysts David Toung, who rates shares at Buy.
"Despite near-term headwinds from COVID-19, Merck is seeing sequentially stronger end-market demand for its products as physician offices reopen, elective surgeries resume, and pet owners return to veterinary offices," the analyst writes in a note to clients. "The company continues to see strong sales of Keytruda, Lenvima, and Lynparza. Expanded indications for these oncology therapies are driving sales growth."
Hedge funds are likely attracted to the pharma firm's track record, as well. Merck and rival hedge-fund favorite Pfizer both happen to rank among the 50 best stocks of all time.
- Market value: $278.5 billion
- Dividend yield: N/A
- Analysts' recommendations: 27 Strong Buy, 10 Buy, 6 Hold, 1 Sell, 1 Strong Sell
Digital mobile payments and financial technology/e-commerce stocks in general are hot and only getting hotter. With its ample market value, reasonable moat and extensive reach, it makes sense that hedge funds would pour into PayPal (PYPL).
The growth in mobile payments transactions, monetization of its Venmo property and incremental revenue growth in its Xoom business all help prop up the bull case for analysts and investors alike.
And as attractive as fellow blue-chip stocks Mastercard (MA) and Visa (V) might be in a world of expanding mobile payments, some analysts say PYPL is among the best bets in the space.
"Simply put, PayPal should continue to benefit from the secular shift to e-commerce that should drive a roughly 20% revenue compound annual growth rate (CAGR), which, coupled with margin expansion and capital allocation (mergers & acquisitions plus stock buybacks), should result in an earnings CAGR north of 20% over the next several years," writes Raymond James analyst John Davis, who rates the stock at Overweight (Buy).
The Street is certainly aligned with Davis' view of PYPL's bottom-line prospects. Analysts' consensus forecast is for earnings to grow at an average annual rate of more than 21% over the next three to five years, according to S&P Global Market Intelligence.
Shares in PYPL have more than doubled over the past year vs. a gain of about 29% for the S&P 500. Analysts' average target price of $305.15 gives PYPL implied upside of about 35% in the year ahead.
- Market value: $369.1 billion
- Dividend yield: 0.5%
- Analysts' recommendations: 23 Strong Buy, 10 Buy, 5 Hold, 1 Sell, 0 Strong Sell
It seems like everyone loves Mastercard (MA). The global payments processor is a favorite of hedge funds and analysts, and no less an eminence than Warren Buffett is a bull too.
Berkshire Hathaway owns 4.7 million shares in Mastercard, a position initiated by lieutenant portfolio managers Todd Combs and Ted Weschler. Buffett himself has said he wishes he had pulled the trigger sooner.
Hedge funds and other Mastercard bulls are high on the name thanks to both company-specific strengths and the relentless global adoption of digital transactions.
"Mastercard is a key beneficiary of the long-term secular shift toward electronic forms of payments, and that new technology (e.g., mobile devices, mobile point-of-sale terminals, and e-commerce) is helping accelerate the shift," writes William Blair equity analyst Robert Napoli, who rates MA at Outperform. "The company continues to enjoy substantial barriers to entry because of its massive scale and global reach, leading security and data management skills, information intelligence, brand recognition, and trust."
And make no mistake, the Street expects seriously outsized profit growth ahead. Analysts forecast MA to generate average annual earnings growth of more than 23% over the next three to five years, according to S&P Global Market Intelligence.
Furthermore, hedge funds and other bulls have to take heart in Mastercard's track record as a market-beating machine. MA has outperformed the broader market on an annualized basis by 12, 15 and 17 percentage points over the past three-, five- and 10-year periods, respectively, according to Morningstar data.
10. Johnson & Johnson
- Market value: $412.5 billion
- Dividend yield: 2.6%
- Analysts' recommendations: 8 Strong Buy, 4 Buy, 7 Hold, 0 Sell, 0 Strong Sell
Whether we're talking hedge funds, mutual funds or other large piles of equity money, Johnson & Johnson (JNJ) is a must-have blue-chip holding for any large-cap healthcare portfolio.
J&J has most recently been in the news thanks to the Food and Drug Administration's recent approval of its COVID-19 vaccine for emergency use. But the big picture that makes the company attractive to hedge funds goes far beyond this important new weapon in the war against the novel coronavirus.
J&J, a member of the Dow Jones Industrial Average, operates in several different areas of healthcare, including pharmaceutical products and medical devices. Analysts have been pleased with the way the various facets of the company's business have held up throughout the pandemic.
And as welcome as the FDA's vaccine approval may be, it's but a small contributor to the company's earnings prospects. More important is Johnson & Johnson's success in integrating Momenta Pharmaceuticals, which it acquired in 2020 in a $6.5 billion deal, analysts note.
Bulls also point to JNJ's strong pharmaceutical pipeline and a rebound in medical devices as patients undergo elective procedures they put off during the pandemic.
"In addition, the company is benefiting from a growing consumer business," says Argus Research analyst David Toung, who notes that strength in oral care, wound care and skin health & beauty products also contribute to his Buy recommendation on the stock.
Hedge funds doubtless also appreciate the company's commitment to delivering income to investors. The company announced a dividend hike in April 2020, to $1.01 per share from 95 cents. That marked Johnson & Johnson's 58th consecutive year of dividend increases.
9. Berkshire Hathaway
- Market value: $596.0 billion
- Dividend yield: N/A
- Analysts' recommendations: 1 Strong Buy, 3 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Think of it as a case of "if you can't beat 'em, join 'em."
Berkshire Hathaway's appeal for the hedge fund crowd is obvious. Warren Buffett's conglomerate has been one of the best long-term investments of all time.
Buffett's record going up against the broader market over long periods of time is second to none. So what could make a hedge fund manager's life easier than essentially offloading some of his or her work to Uncle Warren?
Under the direction of Buffett and partner Charlie Munger, Berkshire Hathaway created almost $356 billion in wealth from 1976 to 2016, good for an annualized return of 22.6%. That helped Berkshire Hathaway rank among the top 50 stocks of all time.
Although insurance is the cornerstone of Berkshire's business, scores of wholly owned subsidiaries like BNSF Railway, as well as stakes in blue-chip stocks from Apple (AAPL) to American Express (AXP) to Coca-Cola (KO), make BRK.B shares a diversified bet on the broader economy. More recently, Buffett has pared back greatly on bank stocks and initiated positions in blue chips such as Verizon and Chevron (CVX).
Just don't ask the analysts what they think. Only four cover the B Class shares and just three track the A Class shares. For what it's worth, the B shares have one Strong Buy call and three Holds.
8. JPMorgan Chase
- Market value: $462.1 billion
- Dividend yield: 2.4%
- Analysts' recommendations: 13 Strong Buy, 6 Buy, 6 Hold, 1 Sell, 2 Strong Sell
As the nation's largest bank by assets – and a component of the Dow Jones Industrial Average – JPMorgan Chase (JPM) exerts a strong pull on large institutional investors like hedge funds.
Not all big investors are as bullish on the sprawling money center bank as hedge funds, however. Warren Buffett's Berkshire Hathaway sold off the remainder of its stake in JPM in the fourth quarter of 2020. Although the move came as part of a larger selloff of BRK.B's bank holdings, consider that around this time last year, Buffett's holding company was JPM's sixth-largest shareholder.
Although bears can point to risks such as the potential for sustained economic sluggishness, a deterioration in credit quality or a slowdown in capital market activity, bulls say JPM is better set than most to handle such obstacles.
"We continue to believe JPM is poised to be a relative outperformer whether the operating environment continues to rebound or enters a 'double-dip' recession,'" says Piper Sandler's Jeffery Harte, who rates JPM at Overweight (Buy).
Analysts project JPM to deliver average annual earnings growth of 7.2% over the next three to five years, according to S&P Global Market Intelligence. Shares in the bank are up about 20% for the year-to-date, vs. a gain of just 2% for the S&P 500.
7. Walt Disney
- Market value: $364.0 billion
- Dividend yield: N/A
- Analysts' recommendations: 15 Strong Buy, 6 Buy, 5 Hold, 1 Sell, 0 Strong Sell Coronavirus took a huge bite out of some of Walt Disney's (DIS) most important businesses: namely, its theme parks and studios, but after encouraging quarterly results, analysts say business is set to bounce back in a big way.
"While the near-term visibility remains somewhat limited by the COVID-19 surge, DIS is one of the likely prime beneficiaries of further reopening of the global economy, with improved near-term prospects of vaccine development," says CFRA Research, which calls the stock a Buy.
In the meantime, CFRA likes that DIS is "systematically pivoting to a direct-to-consumer-centric strategy on COVID-19 demand tailwinds for its streaming offerings (Disney+, ESPN+, Hulu)." The entertainment behemoth reached more than 120 million aggregate subscribers in its fiscal first quarter, and remains on track with the international rollout of Disney+.
Disneyland and other California amusement parks will be allowed to reopen with limited capacity and other restrictions on April 1.
The Street, on average, is solidly bullish on Disney stock. Fifteen analysts rate it at Strong Buy, six say Buy, five call it a Hold and one has it at Sell. They project the company to generate average annual earnings growth of 9% over the next three to five years.
Shares in the company are up by roughly 30% over the past three months. However, with an average price target of $204.23, analysts give DIS implied upside of less than 2% in the next 12 months or so.
- Market value: $471.1 billion
- Dividend yield: 0.6%
- Analysts' recommendations: 22 Strong Buy, 10 Buy, 5 Hold, 1 Sell, 0 Strong Sell
Few blue-chip Dow 30 stocks get as many high marks from analysts, mutual funds, hedge funds and – yes – Warren Buffett than Visa (V).
As the world's largest payments network, Visa is well-positioned to benefit from the growth of cashless transactions and digital mobile payments. Indeed, analysts polled by S&P Global Market Intelligence expect Visa's profits to increase an average of more than 19% annually over the next three to five years.
Although COVID-19 took an axe to certain transaction volumes – such as cross-border travel – Visa is poised to bounce back as the pandemic eases, making it a solid recovery play, bulls say.
"Cross-border volumes were again hard hit in the first quarter, down over 20%, as two-thirds of this spending has historically come from global travel," says Argus Research's Stephen Biggar, who rates V at Buy. "But payment volumes and processed transactions both bottomed in April 2020, and have improved consistently since then."
Argus Research adds that it continues to expect secular growth in payment volumes and believes that "solid cost controls and strong buyback activity will aid earnings."
Of the 40 analysts covering the payments processor tracked by S&P Global Market Intelligence, 22 call Visa a Strong Buy and 10 have it at Buy, and six say it's a Hold. Two analysts have no opinion.
Analysts' average target price of $239.43 gives Visa stock implied upside of about 9% over the next 12 months or so. Shares are lagging the broader market for the year-to-date, up 1% versus a gain of about 2% for the S&P 500.
- Market value: $1.4 trillion
- Dividend yield: N/A
- Analysts' recommendations: 31 Strong Buy, 11 Buy, 2 Hold, 0 Sell, 0 Strong Sell
It should come as no surprise that hedge funds are big believers in Google parent Alphabet (GOOGL). The stock has been a key driver of a rally in technology stocks that propelled the Nasdaq Composite to all-time highs just a few weeks ago.
"Alphabet continues to drive growth at scale through strength in mobile search, YouTube, and programmatic advertising, while investing in other key initiatives (cloud, hardware, AI) that should serve as multi-year growth levers," writes Stifel equity research analyst Scott Devitt, who rates shares at Hold.
In the near-term, however, the analyst expects the advertising industry to be "meaningfully impacted by COVID-19 measures."
If nothing else, the company's pandemic performance in totality bolstered the case that Alphabet is not a one-trick pony. GOOGL's numerous other endeavors likewise shore up the case. For example, Alphabet is a key player in cloud-based services, and home to Nest Labs and self-driving car startup Waymo. Artificial intelligence, machine learning and virtual reality are other areas of heavy investment.
Analysts expect GOOGL to deliver average annual earnings growth of more than 18% over the next three to five years, according to data from S&P Global Market Intelligence. That's a truly torrid pace for a company with a market capitalization as gargantuan as Alphabet's.
The stock is up more than 14% for the year-to-date, beating the Nasdaq Composite by about 16 percentage points. The Street's average target price of $2,372.35 gives the stock implied upside of 18% in the next year or so.
- Market value: $2.0 trillion
- Dividend yield: 0.7%
- Analysts' recommendations: 21 Strong Buy, 8 Buy, 8 Hold, 2 Sell, 1 Strong Sell
With its massive market value – it reigns as the world's largest publicly traded company – standing as a member of the Dow and cornerstone of the tech sector, it's only natural that hedge funds are in love with Apple (AAPL).
Heck, the company just enjoyed its most profitable quarter ever, thanks to strong sales of high-end iPhones and a pandemic-driven surge in demand for its laptops and tablets.
Given AAPL's latest run of success, it's no surprise that hedge funds and Wall Street analysts are so bullish on the name. In a note titled "iPhone 12 Strength Not Slowing Down; More Good News on the Horizon," Wedbush Securities analyst Daniel Ives positively gushes over the gadget maker.
"Given the fundamental strength we are seeing for this supercycle, coupled by a further re-rating on the horizon, we believe Apple will hit $3 trillion in market value by year-end," says Ives, who rates the stock at Outperform. (Apple's current market value sits just north of $2.1 trillion.)
Adds Ives: "The hearts and lungs of the Apple growth story are built around iPhone installed base upgrades. With 5G now in the cards and roughly 40% of its 'golden jewel' iPhone installed base not upgrading their phones in the last 3.5 years, Apple's CEO Tim Cook has the stage set for a supercycle 5G product release to play out in 2021."
Analysts' takes aside, there is perhaps no bigger Apple bull than Warren Buffett. The chairman and CEO of Berkshire Hathaway has allocated almost half of his holding company's equity portfolio to AAPL.
"I don't think of Apple as a stock," Buffett has said. "I think of it as our third business."
- Market value: $745.0 billion
- Dividend yield: N/A
- Analysts' recommendations: 34 Strong Buy, 7 Buy, 4 Hold, 1 Sell, 1 Strong Sell
Facebook (FB) might be feeling increasing heat from critics and would-be regulators, but hedge funds don't much care. Such is the potential earnings power of the world's largest social network.
The headwinds of negative press and mounting anxiety over the potential for greater federal oversight have FB stock down more than 3% so far in 2021, but bulls don't expect shares to languish for long.
After all, the fundamentals are too compelling. Facebook forms a digital-advertising duopoly with Google, thanks to its nearly 2.8 billion monthly active users worldwide. But there's more to the company than its eponymous network. It also owns Instagram, the increasingly popular photo-sharing platform, and mobile instant-messaging apps WhatsApp and Messenger. And let's not forget about Oculus, a virtual reality company.
Although FB "can't seem to keep out of the headlines given the political strife in the U.S.," and was further damaged by an antitrust complaint bright against the company in December, Argus Research analyst Joseph Bonner says the stock is a Buy.
"While COVID-19 has hit advertising spending from travel, entertainment and lodging companies particularly hard, it has also accelerated the secular shift toward digital advertising for products – which benefits Facebook," Bonner says in a note to clients.
Analysts forecast annual average earnings growth of more than 20% for the next three to five years. That's sort of astonishing for a company worth almost three-quarters of a trillion dollars.
- Market value: $1.5 trillion
- Dividend yield: N/A
- Analysts' recommendations: 37 Strong Buy, 10 Buy, 0 Hold, 0 Sell, 0 Strong Sell
Amazon.com (AMZN), with its massive market value and dominance in e-commerce, routinely ranks among the very most popular of hedge fund stocks.
Even Warren Buffett got in on the act. Berkshire Hathaway has been an Amazon shareholder since 2019.
And everyone has enjoyed outsized gains over the short, medium and long term. Get this: on an annualized basis, AMZN has beaten the broader market by 24, 10, 23, 20 and 24 percentage points, respectively, over the trailing one-, three-, five-, 10- and 15-year year periods.
The pandemic has proven to be a bonanza for the e-commerce giant.
"Amazon is one of the primary beneficiaries of COVID given accelerated e-commerce sales growth and Prime membership adoption, as well as the digital transformation that will accelerate cloud services adoption," writes Stifel analyst Scott Devitt, who rates shares at Buy.
The analyst adds that the pandemic sparked online adoption of grocery and consumables, "categories Amazon has struggled to penetrate for many years," and which should support its next leg of retail growth.
Stifel's investment thesis is common on the Street, which is wildly bullish on AMZN's prospects – a state of affairs that certainly makes it easy for hedge funds to take the plunge.
Out of 47 analysts issuing recommendations on the stock tracked by S&P Global Market Intelligence, 37 rate it at Strong Buy and 10 say Buy. They project Amazon to generate average annual profit growth of 37% over the next three to five years – a stunning forecast for a company of its size.
- Market value: $1.8 trillion
- Dividend yield: 1.0%
- Analysts' recommendations: 25 Strong Buy, 9 Buy, 2 Hold, 0 Sell, 0 Strong Sell
Microsoft (MSFT) might be the world's second-largest publicly traded company after Apple, but it once again beats the iPhone maker when it comes to being hedge funds' most popular stock.
The key to the bull case on MSFT is its astonishing success in cloud-based services for enterprise customers and consumers, alike.
"This current work from home environment is further catalyzing more enterprises to make the strategic cloud shift with Microsoft across the board with Azure growth remaining brisk," says Wedbush's Daniel Ives, who places MSFT (Outperform) on the firm's Best Ideas List. "In many cases we are seeing enterprises accelerate their digital transformation (larger deals) and cloud strategy with Microsoft by 6 to 12 months as the prospects of a semi remote workforce for the foreseeable future looks here to stay."
Argus Research says MSFT's management and good timing make shares an easy Buy call.
"CEO Satya Nadella has pivoted Microsoft toward high-value commercial and cloud application businesses, just the right product set as enterprises rapidly move to the cloud and remote connectivity," writes Argus analyst Joseph Bonner. "As expected, Azure and the Xbox gaming console refresh drove impressive December-quarter results. All three of the company's segments reported double-digit revenue growth."
Analysts forecast the Dow stock to deliver average annual earnings growth of 14.2% over the next three to five years. Their average target price of $274.76 gives MSFT implied upside of about 21% over the next 12 months or so.
|For more news you can use to help guide your financial life, visit our Insights page.|