Markets

3 'Strong Buy' Large-Caps Hedge Funds Are Buying Now

The hedge funds’ 13F filing season generates a blizzard of raw data, and the sheer volume is a tad overwhelming. Fortunately, the major financial players will throw that data to teams of analysts, who wade in undaunted, and re-release the figures in distilled form. The result: hedge fund trends become easily discernable. So, let’s thank Citi Research for comparing the 13Fs of the 50 largest hedge funds, and telling us where those funds were investing in the last quarter.

The results are interesting; the four most popular stocks bought by those hedge funds were Facebook, Microsoft, Alphabet, and Amazon. It was a who’s who of big tech companies, the ones that have made headlines, sometimes for the wrong reasons, but usually for gigantism: huge companies, huge share prices, huge returns, and huge profits. Let’s look into TipRanks’ database, and see what the top Wall Street analysts are saying about these companies now.

Facebook, Inc. (FBResearch Report)

Facebook, more specifically, Mark Zuckerberg, has been hammered in the headlines for much of the last year and half. From testifying to Congress, to getting caught up in data privacy scandals, it just seems that Zuckerberg can’t win. Except that the result was that FB stock fell 22% in 2018- and became increasingly reasonable in terms of price.

According to data from Citigroup, 15 of the 50 largest funds loaded up on Facebook stock – compared to only 6 in the previous quarter. So far, it seems to have been a good investment, as FB shares are up $30 since the start of the year.

Consistently strong financial, typified by a good Q4 earnings report, have boosted Facebook. Analyst Ronald Josey (Track Record & Ratings), of JMP Securities, noted that “renewed confidence that usage, engagement, and monetization can continue to grow meaningfully as investments around Video, Stories, and Messaging, among others, begin to deliver ROI.” He acknowledges that data privacy and security issues remain a concern, but even so, he raised his price target to $195, indicating a 20% upside potential.

Merrill Lynch’s Justin Post (Track Record & Ratings) agrees that data privacy may continue to haunt Facebook, and noted that a UK Parliamentary committee has recently released a report on the subject – a concern, since the UK levied a fine of 500,000 pounds on the company after the Cambridge Analytica fiasco last year. Post remains bullish, however, due to FB’s financial situation, confident that the company can weather regulations. His price target is $205, suggesting an upside of 26% to the stock.

So it’s no wonder that Facebook retains a ‘Strong Buy’ analyst consensus. Shares are priced at $161, and the average price target of $189 gives a 17% upside. FB’s overall rating is based on an impressive 32 ‘buys,’ with 6 ‘holds’ and 2 ‘sells.’

Microsoft Corporation (MSFTResearch Report)

Bill Gates’ baby Microsoft has been around since 1975, so pushing its mid-forties it’s considered old for a tech company. Call it ‘mature middle age.’ It brings certain advantages to a company. For starters, Microsoft has been a recognized and well-known brand for decades. Its Windows OS is ubiquitous, and by putting its Office software on the cloud, it made a good product more convenient for more users. And the company has long ago outgrown the sort of media headlines that have been plaguing Facebook.

Citigroup’s data shows that 14 of the largest hedge funds are increasing their MSFT holdings. While this is down from last quarter’s 21, it still represents 28% of the largest funds – clearly, Microsoft offers a strong investment opportunity.

Top analysts agree that Microsoft is worth buying. The #3 rated analyst in the TipRanks database, Ross MacMillan (Track Record & Ratings) from RBC Capital, give the stock a solid ‘buy’ rating with a $124 price target – implying an 11% upside.

Morgan Stanley’s Keith Weiss (Track Record & Ratings) shares this confidence, shown by his $140 target on MSFT stock. He sees MSFT as a buying opportunity now, and says, “As the IT conversation shifts from pure Public Cloud towards Hybrid Cloud architectures, Microsoft will pull ahead as the best secularly positioned firm in tech. The company's secular positioning and durable growth give it the best risk/reward in software.” Weiss’s price target suggests a 26% upside to this stock.

With shares trading at $110, and an average price target of $123, MSFT has an upside of 11%. The stock holds a ‘Strong Buy’ by the analyst consensus, based on 20 ‘buy’ ratings, 1 ‘hold,’ and 1 ‘sell.’

Alphabet, Inc. (GOOGLResearch Report)

Alphabet’s greatest strength is simultaneously its greatest public liability. Its Google search engine has access to the world’s greatest library of online data – everything from personal search habits to vital stats – and it uses that information to create the perfect platform for targeted online advertising. It’s a product with an unlimited customer base: literally every company with an online presence.

That ubiquitous product and near-infinite product reach may explain why 26% of the largest hedge funds – 13 altogether, by Citi’s data – are investing more in GOOGL. The company’s analyst reviews provide additional clarity.

Start with Mark Mahaney (Track Record & Ratings), of RBC Capital. Mahaney points out “significant secular growth for internet advertising, very strong market share in core search business, and significant competitive moats.” His price target, $1,300, suggests a 16% upside to GOOGL.

Meanwhile SunTrust’s Youssef Squali (Track Record & Ratings) gives greater detail coming to a similar conclusion. He says, “The company's core business of Search and especially YouTube are performing at impressive growth levels, with added support coming from the scaling segments like Cloud, Play, and hardware and emerging ones like Waymo. Expect Alphabet to sustain its mid-teen growth over the next several years with a focus on incremental profit and free cash flows, making the stock an attractive growth story at a compelling valuation.” Squali gives GOOGL shares a 21% upside, with a $1,350 price target.

Alphabet’s analyst consensus is another ‘Strong Buy,’ based on 28 ‘buy’ ratings and only 1 ‘hold.’ The stock’s $1,346 average price target and $1,116 current share price suggest a 20% upside potential.

Facebook, Microsoft, and Alphabet are huge companies, attracting a great deal of media coverage – some by their own intent, and some by force of circumstance. There’s a tendency among investors and analysts, sometimes, to shun the market’s giants, on the theory that you can find better deals with less baggage elsewhere. The big hedge funds don’t seem to agree in this case, and as our closer look at these three suggests, these whales may actually be right.

Author: Michael Marcus

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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