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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows, Contributing Writer
| December 20, 2018
Hedge funds often are referred to as the market’s “smart money” because of their management’s longtime expertise and penchant for making good investing decisions. Sure, they don’t always live up to the hype, and they can be expensive.
But they do comprise a large chunk of institutional investment dollars, and some do perform very well. And as WalletHub points out, hedge funds currently have $3 trillion in assets under management ... so what they’re doing with those assets certainly is interesting, and perhaps even instructive. Certainly, when you’re looking for the best blue-chip stocks to buy, it pays to see what these hedge funds are doing – especially in difficult times such as the current stock-market correction.
Helpfully, WalletHub did a deep dive into which American stocks are most popular with U.S. hedge funds. Combing through regulatory filings, they looked at the positions of more than 400 hedge funds, added up the positions for the same stock, then ranked the stocks by their total holdings value.
Spoiler alert: Every one of these companies is massive by market value. Indeed, they would have to be to accommodate so much institutional interest. It also is no surprise that these stock picks are all household names.
Here are the 25 best blue-chip stocks to buy, based on how heavily they’re held by hedge funds. Many of these stocks have shed some value over the past few months, but most of them have just been swept up in the current market correction. Despite recent pain, it’s not hard to see why these stocks are the ones hedge funds still love the most.
Data is as of Dec. 19, 2018, unless otherwise noted. Companies are listed in reverse order of popularity with hedge funds, according to WalletHub. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Analysts’ ratings provided by Zacks Investment Research.
Market value: $122.6 billion
Dividend yield: 2.2%
Analysts’ opinion: 15 strong buy, 2 buy, 7 hold, 0 sell, 0 strong sell
Medtronic (MDT, $91.26) is one of the world’s largest makers of medical devices, holding more than 4,600 patents on products ranging from insulin pumps for diabetics to stents used by cardiac surgeons. Look around a hospital or doctor’s office – in the U.S. or in about 160 other countries – and there’s a good chance you’ll see its products.
The company is focused on the health of its shareholders as well as its patients: Medtronic has been steadily increasing its dividend every year for more than four decades.
“The performance (for the quarter ended Oct. 26) was good, and we believe that the company has an improved outlook for several business categories in the near term,” say analysts at William Blair, who rate MDT shares at “Market Perform” (hold).
Analysts expect Medtronic’s earnings to increase at an average annual rate of 8.4% for the next five years, according to data from Thomson Reuters.
Market value: $189.3 billion
Dividend yield: 2.5%
Analysts’ opinion: 13 strong buy, 2 buy, 6 hold, 0 sell, 0 strong sell
As a Dow stock with ample market value and liquidity, Home Depot (HD, $167.56) is a natural way for big institutional investors such as hedge funds to bet on both the the health of the U.S. consumer.
Based on recent results at the nation’s largest home improvement chain, consumers are doing just fine. Stifel rates HD at “Buy,” noting that there’s no indication that the slower housing market has affected sales.
The rest of Wall Street tends to agree that this blue chip is attractive at current levels. According to Zacks Investment Research, 13 analysts rate HD stock at “Strong Buy.” Two have it at “Buy,” while six say “Hold.”
Analysts surveyed by Thomson Reuters expect the company to generate average annual earnings growth of more than 14% for the next five years.
Market value: $181.5 billion
Dividend yield: 2.6%
Analysts’ opinion: 13 strong buy, 0 buy, 3 hold, 0 sell, 0 strong sell
Boeing’s (BA, $319.55) massive market value and blue-chip status – it’s a member of the Dow Jones Industrial Average – make it a natural home for hedge funds and other institutional investors.
A long record of consistent share-price outperformance also helps explain why the aerospace giant is so popular with the hedge-fund crowd. Boeing has beaten the broader market over the last one-, three-, five- and 10-year periods.
Although trade-war fears have made for a volatile 2018, BA stock continues to stay aloft. Shares were up 7.5% for year-to-date through Dec. 19, vs. a decline of 7.2% for the Standard & Poor’s 500-stock index.
Analysts forecast Boeing to generate average annual earnings growth of 22.8% for the next five years, according to data from Thomson Reuters. With an average recommendation of “Buy,” analysts expect Boeing to stay aloft better than most other stocks foreseeable future.
Market value: $109.7 billion
Dividend yield: N/A
Analysts’ opinion: 14 strong buy, 1 buy, 6 hold, 0 sell, 0 strong sell
Adobe Systems (ADBE, $224.65) is one of Wall Street’s most highly rated stocks, so it should come as no surprise that it’s popular with hedge funds, as well.
With the likes of Photoshop, Premiere Pro for video editing and Dreamweaver for website design, among others, Adobe is absolutely dominant in its niche of creating software for designers and other creative types.
That’s a huge selling point with analysts. “Adobe has established itself as the unchallenged leader in creative software for both the enterprise and consumer markets,” say analysts at Stifel, who have a “Buy” rating on the stock. “We view Adobe as one of the most compelling investment cases in our coverage areas.”
Shares in Adobe have been outstanding in 2018, gaining 24% as of Dec. 19. The Nasdaq Composite index is down 6% over the same time frame. Wall Street expects the software giant to deliver average annual profit growth of 23% for the next five years.
Market value: $84.4 billion
Dividend yield: 1.6%
Analysts’ opinion: 7 strong buy, 0 buy, 11 hold, 0 sell, 0 strong sell
There’s a lot to love about American Express (AXP, $98.77): Its management is strong, it’s a dominant brand in the industry, and it generates copious amounts of free cash flow – the money left over after essential capital expenditures are made that can be used to finance dividends and stock buybacks.
If it’s good enough for Warren Buffett, it should be good enough for hedge funds too. The chairman and CEO of Berkshire Hathaway (BRK.B) took his first stake in AmEx in the 1960s, and it’s still paying off a half-century later. Today, Berkshire owns 17.8% of the company worth about $15 billion.
The current dividend yield isn’t eye-catching, but it is safe and growing. And the stock is only slightly more volatile than the broader market. Those are attributes that will help any investor sleep better at night.
Market value: $129.0 billion
Dividend yield: 3.4%
Analysts’ opinion: 10 strong buy, 1 buy, 3 hold, 0 sell, 0 strong sell
As one of the nation’s largest banks by assets, Citigroup (C, $52.82) is a no-brainer holding for a wide swath of institutional investors, and hedge funds are no exception.
Analysts as a group are bullish on Citigroup’s fortunes, even as it’s lagged the broader market by a wide margin in 2018. “We’d argue that progress and potential is not yet fully embedded in Citi’s share price; we continue to recommend purchase,” say Credit Suisse analysts, who rate shares at “Outperform.”
Wall Street expects the money center bank to generate average annual earnings growth of 17% over the next five years, according to data from Thomson Reuters. Their average price target of $82.59 gives C stock an implied upside of about 56% in the next 12 months or so.
Citigroup’s stock has been a laggard over the past few years, but its massive market value, share liquidity and central place in the financial system help ensure its popularity among professional asset allocators.
Market value: $113.4 billion
Analysts’ opinion: 18 strong buy, 3 buy, 7 hold, 0 sell, 1 strong sell
No wonder hedge funds love Netflix (NFLX, $266.77). Shares in the streaming media company have clobbered the broader market over the trailing one-, three- and five-year periods. Heck, for 2018 alone, NFLX was up 33% through Dec. 19. The Nasdaq was off more than 5% over the same span.
Whether NFLX stock can maintain its torrid pace remains to be seen, but analysts certainly are optimistic about its bottom-line prospects. The Street forecasts average annual earnings growth of 62% for the next five years, according to data from Thomson Reuters.
Subscriber momentum is back after cooling off earlier in the the year, say Canaccord Genuity analysts, who rate NFLX at “Buy.”
Market value: $482.8 billion
Analysts’ opinion: 3 strong buy, 0 buy, 1 hold, 0 sell, 0 strong sell
If you can’t beat ’em, join ’em.
Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.B, $195.17), is the world’s greatest value investor. His record going up again the broader market over long periods of time is second to none. 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%. Indeed, Berkshire Hathaway also is among the top 50 stocks of all time.
Although insurance is the cornerstone of Berkshire’s business, scores of wholly owned subsidiaries and stakes in everything from Apple (AAPL) to Bank of America (BAC) to Delta Air Lines (DAL) make it a diversified bet on the broader economy.
Market value: $242.6 billion
Analysts’ opinion: 4 strong buy, 1 buy, 4 hold, 0 sell, 1 strong sell
As a blue-chip health-care stock with a massive market value, Pfizer (BRK.B, $41.97) is a natural choice for a wide swath of hedge funds seeking a balance of income and growth.
The Dow component has hiked its dividend annually every year since 2010. At the same time, analysts expect steady, if unspectacular, bottom-line gains. Earnings per share are forecast to rise at an average annual rate of 7.5% for the next half-decade, according to data from Thomson Reuters.
Pfizer is outperforming the S&P 500 by about 23 percentage points so far this year, and that’s before factoring in dividends. Its massive market value, attendant liquidity and blue-chip status should help maintain its popularity with institutional investors such as hedge funds.
Market value: $191.8 billion
Dividend yield: 3.0%
Analysts’ opinion: 8 strong buy, 1 buy, 1 hold, 0 sell, 0 strong sell
Pharmaceutical giant Merck (MRK, $73.77) is a hit with hedge funds thanks to its blue-chip status, long-term wealth creation and a host of current blockbuster drugs.
Cancer-drug Keytruda, for example, is a runaway best-seller, having been approved for advanced melanoma, non-small-cell lung cancer, head and neck cancer, classical Hodgkin lymphoma and bladder cancer. The pharmaceutical giant is seeking additional approvals for Keytruda for a wide range of other cancers. Bulls also point to strength in Januvia for diabetes, as well as Gardasil, a human papillomavirus (HPV) vaccine.
“Merck has been and remains our Top Pick as we see room for significant upside to (profit) estimates as Keytruda continues its impressive rollout,” say Credit Suisse analysts, who rate shares at “Outperform” (buy).
Analysts expect Merck to generate average annual earnings growth of 9.4% for the next five years, according to data from Thomson Reuters. In addition to its pedigree as a component of the Dow Jones Industrial Average, Merck ranks among the 50 best stocks of all time.
Market value: $230.8 billion
Dividend yield: 4.3%
Analysts’ opinion: 8 strong buy, 0 buy, 10 hold, 0 sell, 0 strong sell
With its massive market value and ample liquidity – an average of 12.2 million shares change hands every day – Verizon (VZ, $55.86) is perfect for hedge funds looking for dividends and defense.
The telecommunications giant is as blue-chip as they come. Indeed, it’s the sole telco in the Dow Jones Industrial Average. It’s also a Dividend Achiever, having hiked its payout every year since 2007.
The company has a convoluted history. Verizon came out of the 1980s federal break-up of the old AT&T (T) on antitrust grounds. The company was initially known as Bell Atlantic. The name changed to Verizon as part of the 2000 merger of Bell Atlantic and GTE.
Through it all, however, Verizon has been one of the most productive stocks of our time. From 1984 to 2016, VZ delivered an annualized return of 11.2%, which created $165.1 billion in wealth.
Market value: $203.9 billion
Dividend yield: 3.3%
Analysts’ opinion: 7 strong buy, 0 buy, 7 hold, 0 sell, 0 strong sell
Coca-Cola (KO, $47.90) is another bedrock stock that’s sort of hard to avoid if you’re a big institutional investor. It’s a Dow stock with massive market value and tremendous liquidity sitting smack-dab in the middle of the consumer staples sector.
With the U.S. market for carbonated beverages on the decline for more than a decade, according to market research, Coca-Cola has responded by adding bottled water, fruit juices, teas and other drinks to its product lineup. Its August 2018 acquisition of Costa Coffee parent Costa Limited was applauded by analysts.
“We view KO’s announced acquisition of Costa Limited for $5.1 billion as very positive and a big opportunity for KO over the long term since we see it as an accelerator of KO’s strategy to be the global beverage and coffee leader,” say Wells Fargo Securities analysts, who rate shares at “Outperform.”
In addition to being one of the 50 greatest stocks of all time, Coca-Cola also is an equity income fund’s dream come true. The company has raised its dividend every year for 55 years.
Market value: $342.2 billion
Dividend yield: 2.8%
Analysts’ opinion: 4 strong buy, 2 buy, 6 hold, 0 sell, 0 strong sell
From 1944 through 2016, steady growth and a dependable dividend allowed Johnson & Johnson (JNJ, $127.61) to deliver an annualized return of 15.5%, making it the seventh-best dividend stock of all time.
JNJ operates in several different areas of health care, including pharmaceutical products and medical devices. The company is best-known, however, for its over-the-counter consumer brands including Listerine mouthwash, Tylenol pain reliever and Johnson’s Baby Shampoo.
Johnson & Johnson has a significant problem on its hands at the moment, however. Recent reporting suggests JNJ had known for years that its talcum powder contained the known carcinogen asbestos, underscoring what many have suspected for quite some time now. Shares have plunged quickly in short order as a result.
But hedge funds, and analysts, are hardly budging. Whatever litigation may arise from the allegation still won’t change the fact that the company is well-diversified, and hedge funds seeking exposure to big companies in the health-care sector can’t really avoid JNJ. It’s also a dividend payer extraordinaire, having hiked its payout every year for more than half a century.
Market value: $160.1 billion
Analysts’ opinion: 15 strong buy, 2 buy, 5 hold, 0 sell, 0 strong sell
Cable, broadband and media giant Comcast (CMCSA, $35.19) is one of Wall Street’s best-rated stocks, so it should come as no surprise that it’s highly popular with hedge funds, as well.
It’s also a big hit with active mutual fund managers and just happens to be one of the 50 best stocks of all time. CMCSA generated an annualized return of 12.4% from 2002 to 2016. That was good for lifetime wealth creation of $147 billion.
Comcast, which also owns NBC Universal, recently closed its $39 billion takeover of European pay-TV giant Sky. Jefferies Equity Research says Comcast is a “franchise pick” for investors’ portfolios.
Market value: $193.3 billion
Dividend yield: 0.7%
Analysts’ opinion: 21 strong buy, 2 buy, 3 hold, 0 sell, 0 strong sell
It seems like everyone loves Mastercard (MA, $187.12). The global payments processor is a major favorite of hedge funds and active mutual fund managers, too.
Mastercard also happens to have one of the highest average “Buy” recommendations among Wall Street analysts. And then there’s the imprimatur of the world’s greatest value investor. Warren Buffett’s Berkshire Hathaway owns 4.9 million shares in Mastercard worth about $923 million.
Analysts at Wedbush rate MA at “Outperform,” citing the company’s strong growth trends, unique strategy and robust global brand.
Mastercard has proven to be a wise investment. It has outperformed the broader market by wide margins over the past one-, three-, five- and 10-year periods. Analysts project earnings growth to average 23% a year for next five years, according to data from Thomson Reuters.
Market value: $237.3 billion
Analysts’ opinion: 6 strong buy, 1 buy, 8 hold, 0 sell, 0 strong sell
No wonder Bank of America (BAC, $24.18) is so popular with the hedge-fund crowd. It has significantly outperformed the global bank sector benchmark over the past one, three and five years, according to data from Morningstar.
Analysts are looking for Bank of America to deliver average annual earnings growth of 21% for the next half-decade, which explains hedge funds’ bullishness on the name. But even some canny value investors with longer investment horizons are big fans.
Warren Buffett’s Berkshire Hathaway is Bank of America’s top shareholder with an 8.9% stake in the firm. The BAC stake, worth roughly $21 billion, is Berkshire’s second-most valuable holding after Apple.
Market value: $215.0 billion
Dividend yield: 3.8%
Analysts’ opinion: 12 strong buy, 1 buy, 6 hold, 0 sell, 0 strong sell
Despite a seemingly never-ending stream of bad press, Wells Fargo (WFC, $45.67) remains popular with hedge funds, a plurality of analysts, Warren Buffett and active mutual fund managers too.
We’ve been bullish on WFC on more than one occasion in the past. After all, it’s one of Warren Buffett’s top holdings and has been an exemplary stock for retirement.
Years of share-price underperformance stemming from a phony accounts scandal could be dismissed by long-term investors as a transitory setback, but hedge funds aren’t necessarily known for their patience.
“Recurrence of negative headlines is no longer shocking but still represents an unfortunate development and could impact the stock near-term,” note analysts at Sandler O’Neill and Partners, who rate WFC at “Buy.” Don’t be surprised if WFC proves to be less popular with hedge funds going forward.
Market value: $298.2 billion
Dividend yield: 0.8%
Analysts’ opinion: 23 strong buy, 2 buy, 1 hold, 0 sell, 0 strong sell
It’s easy to see why Visa (V, $131.26) is so popular with hedge funds. As the world’s largest payments network, the company is well-positioned to benefit from the growth of cashless transactions and digital mobile payments. Analysts polled by Thomson Reuters expect Visa’s profits to increase an average of 18% a year over the next half-decade.
Analysts at Credit Suisse, who rate shares at “Outperform,” note that Visa believes “e-commerce still has a lot of runway left in driving payment volume.”
But it’s not just analysts and the high-flying hedge-fund world that has taken a shine to Visa. It also happens to be one of Warren Buffett’s favorite stocks. Berkshire Hathaway owns 10.6 million shares in Visa, worth roughly $1.4 billion.
The market might be down in 2018, but shares in Visa were up more than 12% through Dec. 19.
Market value: $382.9 billion
Analysts’ opinion: 23 strong buy, 2 buy, 7 hold, 0 sell, 0 strong sell
Privacy concerns and growing fears of regulation have pulled heavily on Facebook (FB, $133.24) shares. But that still hasn’t put much of a dent in its popularity with mutual fund managers, hedge fund managers or analysts. At least not yet.
The bottom line is that the world’s most popular social network has more than 2.1 billion active users, and advertisers are keen to reach all those eyeballs.
Facebook also is far more than a one-trick pony. It also owns Instagram, the increasingly popular photo-sharing platform, and mobile instant-messaging apps WhatsApp and Messenger. And it owns Oculus, a virtual reality company.
For all the controversy the company has endured in the past year or so, analysts still expect revenue and earnings per share gains of 36% and 37%, respectively, for the current year.
Market value: $323.5 billion
Analysts’ opinion: 7 strong buy, 1 buy, 6 hold, 0 sell, 0 strong sell
JPMorgan Chase (JPM, $97.29) is the nation’s biggest bank by assets, so any institutional investor looking for exposure to the most important financial stocks is going to feel its gravitational pull.
Banks stocks are having a down year, and JPM in no exception. Analysts at Credit Suisse, who rate shares in JPMorgan Chase at “Outperform,” remind clients that “banking is a cyclical industry and the U.S. has now experienced a relatively elongated expansionary period.” Although risks remain, Credit Suisse sees there is potential upside of 30% or more in JPM and its other top bank stock picks.
Market value: $720.1 billion
Analysts’ opinion: 23 strong buy, 3 buy, 1 hold, 0 sell, 0 strong sell
You can’t fault hedge funds for loving Google parent Alphabet (GOOGL, $1,035.46). Shares have been a key driver of the bull market’s returns for years now, and the future remains bright.
It owns commanding market share in the fast-growing digital advertising industry. Indeed, the Google-Facebook duopoly attracted 84% of global spending on digital ads last year, excluding China.
Alphabet also is home to self-driving car startup Waymo, and Nest Labs, a developer of gadgets for the Internet of Things. Farther afield, the company is plowing investments into the next big things. It has artificial intelligence, machine learning and virtual reality in its sights, and it’s already a major player in cloud-based services.
Shares are off about 4% over the past 52 weeks, vs. a decline of 8% for the S&P 500. Analysts expect earnings to increase an average rate of 15% a year for the next five years.
Market value: $240.8 billion
Dividend yield: 1.4%
Analysts’ opinion: 14 strong buy, 2 buy, 1 hold, 0 sell, 0 strong sell
If you’re a large institutional investor looking to make a big bet in the health insurance sector, you can’t really avoid UnitedHealth Group (UNH, $250.31). With a market value of $234 billion and a 2019 sales forecast of $244 billion, UNH is the largest publicly traded health insurance company by a wide margin.
UnitedHealth’s girth stems from a long history of mergers and acquisitions – including MetraHealth, HealthWise of America and AmeriChoice – and stock-price outperformance. In the past five years alone, UNH shares delivered a total return (price appreciation plus dividends) of 34% over the past five years, according to Morningstar. The broad U.S. stock market generated a total return of just 8.6% over the same span.
Analysts expect UnitedHealth’s earnings to increase an average of 16% annually for the next five years, according to data from Thomson Reuters. If they’re right, UNH should continue its winning ways.
Market value: $763.5 billion
Dividend yield: 1.8%
Analysts’ opinion: 13 strong buy, 1 buy, 14 hold, 0 sell, 0 strong sell
It’s a no-brainer that one of the best stocks of all time would be a hedge-fund darling.
Berkshire Hathaway is no hedge fund – far from it – and it’s buying all the Apple (AAPL, $160.89) it can get. Chairman and CEO Warren Buffett continued to add to his stake in the third quarter.
The bull case for Buffett and hedge funds alike is that Apple consumers, a famously loyal bunch, don’t just buy a single gadget; they buy into an entire ecosystem of hardware, software and services. With an 8.9% stake in Apple, Berkshire Hathaway is the iPhone maker’s largest shareholder.
Analysts expect earnings to rise an average of 13% a year for the next five years.
Market value: $731 billion
Analysts’ opinion: 24 strong buy, 2 buy, 2 hold, 0 sell, 0 strong sell
From Wall Street analysts to mutual fund managers, everyone loves Amazon.com (AMZN, $1,495.08). It’s only natural that hedge funds do too.
The e-commerce giant, which did not prioritize profits for years and years, is forecast to generate average annual earnings growth of 44% for the next half-decade. That’s an astonishing growth rate for a company of Amazon’s size.
“As consumer spending continues to migrate online, Amazon is best positioned to capture a majority share, with a hard to replicate customer loyalty and engagement," write analysts at William Blair, who rate shares at “Outperform.”
Hedge funds are expected to deliver outperformance. They simply cannot ignore Amazon.
Market value: $795.9 billion
Analysts’ opinion: 20 strong buy, 0 buy, 1 hold, 1 sell, 0 strong sell
There’s something wonderful about boring old Microsoft (MSFT, $103.69) being more popular with hedge funds than Amazon, Apple, Alphabet or Facebook.
The software giant’s transition to subscription-based services and cloud computing has lit a fire under the stock. MSFT is up 18% over the past 52 weeks. Alphabet is down 4% over the same time frame, while Apple is off 8%.
Analysts expect more such outperformance to come. William Blair Equity Research has an “Outperform” rating on the stock, noting that Microsoft’s “stellar” results are being driven by continued strength in corporate IT spending and solid execution across all three business segments.
It looks like Microsoft’s amazing second act has made it No. 1 in hedge funds’ hearts.
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