If you are looking for some fresh investing inspiration, look no further. Hedge funds have just revealed their second quarter trades, and the results are now in. RBC Capital has analyzed the 2Q19 13f’s of 363 major hedge funds with significant stakes in US equities. And from this data it has compiled a list of hedge funds’ most popular stocks right now i.e. stocks with the most hedge fund dollars invested.
“In our experience, crowded names among active managers, including hedge funds, are usually crowded for a reason (good fundamentals). Most of our baskets of crowded names have outperformed since we started tracking the data at the end of 2010, and our stats can be used to make the case for hedge fund management” comments the firm.
Nonetheless the firm does add that positioning is still a risk factor worth monitoring. After all, outperformance of popular hedge fund longs has occurred against the backdrop of strong growth leadership in the market “and may merely reflect the underlying style bias of the market that has been in place” says RBC Capital. Notably 60% of the list falls in TIMT (technology, internet, media and telecommunications), down from 70% last quarter.
Here we take a closer look at five top stocks that feature in the Top 20 list. What’s more all these stocks also score a ‘Strong Buy’ analyst consensus, based on all the ratings over the last three months. Let’s see which five stocks make the grade now:
1. Microsoft (MSFT)
Microsoft refused to give up its no. 1 position in the second quarter. It remains the most popular hedge fund stock- despite a sizable decline in the number of funds owning the stock (for the second quarter in a row). Indeed, RBC Capital reveals that hedge funds still hold a whopping $18,131 million of Microsoft shares. That’s with 29% of the 363 funds that it examined holding MSFT stock.
Luckily for these funds MSFT scores a firm ‘Strong Buy’ analyst consensus. That's with a $154 average price target (15% upside potential). Out of 24 analysts covering MSFT right now, 22 are bullish with only 1 hold rating and 1 sell rating (from long time MSFT bear Jefferies' John Difucci).
“We maintain a bullish stance on MSFT as one of our top cloud ideas to own in 2019 based on a multiyear transformation of the model driven by commercial cloud revenue that could reach $100B in CY23 from a $44B run-rate today” celebrated KeyBanc analyst Brent Bracelin after the company reported a solid revenue beat on commercial cloud growth of 39% y/y.
Aptly calling his report ‘On Cloud Nine’, the analyst reiterated his MSFT buy rating while ramping up the price target from $143 to $155. Fiscal 4Q19 results impressed as it sustained double-digit growth for the eighth consecutive quarter, despite a material two-point FX headwind, summed up Bracelin.
2. Facebook (FB)
Facebook shifted up a notch in the second quarter. The social media giant is now the third favorite hedge fund stock, up from fourth place in Q1. That’s due to Alphabet Inc (GOOGL) slipping from #2 to #4 in the quarter after seeing a double-digit decline in ownership. In contrast, six new funds bought into FB in Q2.
According to RBC Capital, 34% of the funds it tracks hold Facebook stock, while the total value of the holding comes out at $16,191 million (so still quite a way off Microsoft).
Analysts share this bullish outlook. With 33 out of 36 analysts calling FB a buy, the $234 average price target suggests over 30% upside lies ahead. Rosenblatt Securities analyst Mark Zgutowicz believes that the demand picture for FB properties could not be stronger. “We maintain our Buy rating and $242 PT on FB shares and would be aggressive buyers on any weakness related to the 4Q guide deceleration” he instructed investors recently.
Demand for the feeds remains high, says Zgutowicz, given stellar ROAS [return on ad spend] and Stories ad tests are steadily progressing at still a low bar for the stock. “Our checks with direct response advertisers continue to point to stellar ROAS on the triple strength targeting platform of News Feed (NF), Messenger and Instagram” he concluded.
3. Netflix (NFLX)
Netflix is hedge funds’ fifth most popular stock. Funds have now invested a jaw-dropping $10,504 million in the stock, with two new funds creating NFLX positions in Q2. As a result, just over a fifth of the funds polled hold NFLX in their portfolio.
So does this mean we have a buying opportunity at hand? After all the stock has pulled back significantly following disappointing earnings results. According to the Street, the answer seems to be yes. The stock is showing a Strong Buy consensus with an average price target of $423. This translates into considerable upside potential of 45%.
“It’s still early in the quarter, but data through July looks solid (rebound from 2Q),” commented SunTrust Robinson’s Matthew Thornton on August 19. “Google searches (on keyword “Netflix”) and mobile app downloads for the month also show nice upticks vs 2Q19 and back toward or above the 1Q19 high-water-mark.”
Although NFLX lost 126,000 US customers in the second quarter, Thornton believes popular series like Sacred Games, The Crown and Peaky Blinders can help stem the losses. With this in mind, the analyst reiterated his NFLX buy rating and $402 price target.
A similar message comes from Bernstein analyst Todd Juenger. “The defining question for investors coming out of Netflix [second quarter] is whether the subscriber miss was simply natural variation (tied to a price increase) in a long-term growth trajectory, in other words a ‘blip,” he told investors. “We think the case for ‘this is a blip’ is compelling.” Clearly hedge funds think so too.
4. Boeing (BA)
Boeing was a new name to the Top 20 hedge fund list in Q2. The world’s largest aerospace company now features in 19% of the 363 funds in RBC’s study (with 9 funds creating new positions in the quarter). These funds own a total of $5,458 million of BA stock.
And on the whole analysts would approve of the fund enthusiasm for BA. If we look at only the Street’s best-performing analysts, the consensus works out at ‘Strong Buy.’ Plus the $429 average analyst price target indicates 20% upside lies ahead.
Of course, all eyes are on Boeing’s 737 Max plane, which suffered two fatal crashes in a five-month span and is currently grounded. According to Bloomberg, there about 600 planes now out of service. However, the Federal Aviation Authority (FAA) just indicated that the model could be ungrounded come October.
“We continue to support the FAA and global regulators on the safe return of the Max to service,” Boeing said in a statement. Following the latest news, five-star Cowen & Co analyst Cai Rumohr reiterated his buy rating with a bullish $460 price target (29% upside potential). He sees a 3-to-1 positive risk-reward around the FAA certification, and expects the stock to react to early indicators of success/failure.
“MAX recovery profile looks intact, and FAA certification flight could be 4-6 weeks off -- a key milestone for the stock” Rumohr said. “Traffic growth, 787 demand, 777x schedule are "watch" items; but they are offset by robust 787 cash generation.” Bottom line: BA remains the analyst’s top pick for cash flow per share of $30+ (9-10% yield) in 2020 & 2021.
5. Union Pacific Corp (UNP)
Union Pacific is a leading railroad franchise, covering 23 states in the western two-thirds of the United States. Like BA, UNP is a new addition to the Top 20 list of hedge fund stock holdings. Eight new funds created UNP positions in Q2, while the total $ value owned now stands at $5,157 million. We can also see that 15% of funds in RBC’s study own Union Pacific.
So what’s driving this wave of bullish sentiment? Well, the company just posted a 2Q EPS and EBIT beat and a record operating ratio despite being significantly hindered by flooding. “We raise our estimates and PT and continue recommending UNP as a top pick” five-star Cowen & Co analyst Jason Seidl wrote following earnings.
He now sees shares hitting $184 vs his previous $180 price target. “UNP is one of the best managed North American Class I railroads and the only western one that is publicly traded” stated Seidl. With the hire of Jim Vena as COO, he believes the company is on its way to revenue improvement.
That’s thanks to the adoption of Precision Scheduled Railroading (PSR). Created by the late Hunter Harrison, PSR refers to the principle of generating extra revenues by using fewer railcars and locomotives. According to Seidl, UNP's precision scheduled railroading rollout is on the right track so far. He notes, for instance, a 10% increase in train length that has seen UNP increase their parked locomotives to 2,150.