Goldman Sachs has just carried out an in-depth analysis of 855 hedge funds. These funds boast total assets of around $2.1 trillion. And the results are very interesting. Stocks with the most popular long positions and the highest concentrations returned 18% in 1Q19, easily beating the 15% return for the S&P 500. This is something of a pattern- since 2001 stocks meeting these two criteria have crushed the market 61% of the time, according to the firm.
“Clients often ask us to include hedge fund ownership data in stock screens, expressing a preference for buying ‘under-owned’ stocks,” Goldman Sachs strategist Ben Snider told investors. “In fact, during the past decade hedge fund popularity has been a more useful criterion for selecting stocks than valuations.”
He continued: “The signals from hedge fund popularity and valuation have been particularly useful in combination, especially for investors with slightly longer investment horizons. During the past decade, popular stocks have generally outperformed unpopular stocks across both 3- and 12-month investment horizons.”
So which stocks should you be betting on right now if you want to follow this strategy? Here we take a closer look at three stocks in Goldman Sachs’ VIP basket of top hedge fund stock names.
What is the Smart Score?
As you will see below, all three of these stocks also boast a ‘perfect’ Smart Score of 10/ 10. If you haven’t discovered it already, the Smart Score pulls together 8 data sets to create a powerful rating that unites all of TipRanks’ unique stock insights. This includes everything from analyst ratings to financial blogger opinions, insider and hedge fund activity as well as technical momentum. The fact that the following three stocks score so highly here adds further weight to their investing credentials.
Amazon (AMZN – Research Report)
Even after a 24% year-to-date gain, analysts continue to predict further upside potential for Amazon stock. That’s lucky for hedge funds with AMZN appearing in 29% of portfolios (and as a Top 10 holding in 13% of these portfolios).
Goldman Sachs analyst Heath Terry recently ramped up his AMZN price target from $2,100 to $2,400. From current levels that indicates sizable upside potential of 29%. The analyst stated "We continue to believe AMZN represents the best risk/reward in Internet given the relatively early-stage shift of workloads to the cloud, the transition of traditional retail online, and share gains in its advertising business, the long-term benefits of each we believe the market continues to underestimate for Amazon".
Indeed all 34 analysts covering AMZN rate the stock a ‘Buy’, making this one of the Street’s most popular stocks right now.
Netflix (NFLX – Research Report)
Despite negative investor sentiment, Netflix still receives the highest possible Smart Score of ’10.’ That’s with Very Bullish news sentiment, and increased hedge fund activity. In the last quarter, hedge funds boosted total NFLX positions by 7% to 29 million shares.
“We believe that Netflix has achieved a level of sustainable scale, growth, and profitability that isn’t currently reflected in its stock price. This conclusion is based on our assessment of Netflix’s 62 million U.S. Subscriber and 94 million International Subscriber bases, which makes Netflix one of the largest global Entertainment subscription businesses” cheers RBC Capital analyst Mark Mahaney.
He has a $480 price target on the stock- indicating shares can rise a further 33%. Bear in mind, Netflix is already trading up 34% year-to-date following the release of solid first quarter earning results. “Netflix offers a truly compelling value proposition with global appeal, in our view. So compelling that it is embarking on what is likely to be its fourth successful price increase in the last five years. So global that it now has 149MM Global Paid Subs, of which 89MM are overseas, and its Paid Sub Adds are likely to increase for the seventh consecutive year” summed up the analyst.
Facebook (FB – Research Report)
Social media giant Facebook has surged by over 40% year-to-date. And according to the Street’s average analyst price target of $221, a further 19% upside potential lies ahead.
Five-star Monness analyst Brian White is more bullish than most. He believes shares can spike 35% to $250. “With sales up 45% per annum over the past four years, EPS turning in a 62% CAGR and one of the highest operating margins in our coverage universe, we believe Facebook should trade at a healthy premium to the market and tech sector” explains White.
The analyst boosted his price target from $225 following ‘excellent’ first quarter results. Even in the eye of doom and gloom, FB reported yet another earnings beat exclaimed the analyst. Meanwhile monthly active users soared 8% year-over-year to a mind blowing 2.375 billion. So it’s not surprising that RBC’s Mark Mahaney also highlights FB as his #1 Large Cap Internet Long.
As for the Smart Money, FB crops up in 28% of hedge fund portfolios. And for 9% of these funds, it’s also a Top 10 holding.
Looking for further inspiration?
Other ‘Strong Buy’ stocks in Goldman Sachs’ hedge fund basket include Visa (V), Alibaba (BABA), Alphabet (GOOGL) and Microsoft (MSFT). Even though it has a more cautious ‘Moderate Buy’ analyst consensus, major biotech Celgene (CELG) also makes the cut. Several analysts downgraded the stock to neutral following the news that the company will be acquired by Bristol Meyers (BMY). The $74 billion deal, one of the largest pharma deals in history, saw CELG shares spike 38% in January.
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