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Pro investors are back to buying in 2016. All it took was a stock market that’s hitting new all-time highs.
Hedge funds were net buyers of stocks in all sectors but two during the second quarter of 2016, a pretty clear conviction buy signal from a group of market participants that’s been far from bullish of late. But it’s not just the fact that funds are buying stocks again that should catch your interest right now. The specific stocks they’re buying can tell you a lot about the stocks you might want to think about for your own portfolio.
Think of it like an investing shortcut. By leaving the hard analysis to the pros, you get all the perks of a well-staffed equity research department, without paying the hefty management fees the world’s most successful hedge funds charge.
And believe it or not, you don’t have to guess to figure out what the funds are buying right now. In fact, they’ll tell you.
That’s because institutional investors with more than $100 million in assets are required to file a 13F, a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to submit a form 13F to the SEC.
Want to know which stocks are pro investors’ favorites? Those 13F filings hold the key.
By comparing one quarter’s filing with another, we can see how any single fund manager is moving their portfolio around. And by looking at those changes collectively, we can see which stocks the pros are betting on as a group. In other words, we can see which stocks Wall Street loves. While the data is generally delayed by about a quarter, that’s not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That’s all the more reason to crack open the moves being made with pro investors’ $21 trillion under management.
Without further ado, here’s a closer look at five stocks fund managers love right now.
What’s not to like about Amazon.com (AMZN) right now? Eight months into 2016, and this big e-commerce stock is up 13.4%, beating the rest of the S&P 500 by more than double. And maybe more important, that double-digit rally is pushing Amazon to lifetime highs this summer, indicating that this stock isn’t just working in 2016’s trading environment — it’s thriving.
While they’ve been a bit late to that party, hedge funds want to participate in Amazon’s upside this summer. In the second quarter, funds added more than 1.4 million net shares of the stock to their portfolios, which combined with this stock’s price appreciation makes it the biggest positive market value change among institutional investors that have submitted their 13F filings for the quarter so far. That’s particularly notable because Amazon was one of funds’ most sold-off stocks back in the first quarter.
Amazon is one of the dominant names in the e-commerce business — and a great example of the idea that being big doesn’t necessarily preclude breakneck growth rates. In the last three years, Amazon has grown its top line by more than 75%. For a retail site known for essentially carrying everything, one of the fastest-growing segments has been in digitally fulfilled products and services. For instance, Amazon generated 7% of its revenue from its cloud computing services last year, a category that wasn’t even big enough to be reported separately as recently as 2012.
At the end of the day, Amazon is all about scale. The firm’s scale has enabled it to shorten the lead time between orders and deliveries, and it’s enabling the firm to experiment with novel approaches to infrastructure, such as running its own cargo airline and last-mile delivery capabilities.
Buyers are clearly still in control of Amazon’s price action as the calendar flips to September. While hedge funds got this story wrong a quarter ago, they’re correcting their mistakes now.
This time last year, Exxon Mobil (XOM) ) wouldn’t have made any pro investors’ “love lists.” But 2016 has been a rebound year for this oil and gas supermajor, and as shares sit atop a 12% rally year-to-date, Exxon looks like it could still have considerable upside potential ahead of it. Last quarter, funds added 30.19 million net shares of XOM to their portfolios, making it a $2.6 billion buy operation at current price levels.
Exxon is the biggest integrated energy company in the world, with daily production of 2.1 million barrels of liquids and 11.1 billion cubic feet of natural gas on average last year. Not surprisingly, Exxon’s reserves are equally massive. Proved reserves stood at 25.3 billion barrels of oil equivalent last year. Besides its huge production business, Exxon is also the world’s largest refiner and a major chemical producer. Those operations further downstream have helped to reduce Exxon’s commodity risk at the same time that peers have been breaking off their downstream operations.
One result of that integrated approach to energy production is Exxon’s standing as the most profitable oil company on the planet on a per-barrel basis. Because Exxon has better cash-on-cash returns on its wells than smaller peers, it’s able to continue pulling oil out of the ground, even at lower crude prices. Likewise, the firm’s staying power gives it the ability to weather slow periods for the energy sector, potentially taking advantage of acquisition opportunities in smaller distressed E&P stocks along the way.
Look for Exxon’s outperformance to continue in 2016.
Big telco AT&T (T) is another hedge fund favorite that’s been a stellar performer so far this year. Including this stock’s whopping 4.7% dividend yield, AT&T has handed investors total returns of 23.3% since the start of 2016. And hedge funds are accounting for a larger chunk of those shares. Last quarter, funds bought up nearly 45 million shares of AT&T on a net basis. That’s $1.8 billion in buying pressure at current price levels.
AT&T is the number-two name in the cellular network battle, coming in slightly behind main rival Verizon Communications (VZ) from a subscriber count standpoint. That said, don’t mistake being No. 2 for being small; AT&T boasted more than 100 million wireless subscribers in the most recent quarter. AT&T also has a sizable fixed line business, and it added millions of satellite TV subscribers in the U.S. and Latin America to its Rolodex through the acquisition of DirecTV, which closed last summer.
Part of AT&T’s performance has been fundamental, and another big part of its double-digit rally in 2016 has been driven by macro factors, namely the Fed. While investors entered 2016 generally expecting another rate hike from the central bankers early-on in the year (and priced rate-sensitive stocks accordingly), that rate hike never materialized. As a result, AT&T’s share price has played catch up to that dividend-fueled discount. Because it’s one of the highest-yielding stocks in the S&P 500, it’s also been one of the strongest rebounders as income investors flocked back to shares.
Broadly, the timing still looks pretty good here. While AT&T has corrected a bit in August, the primary trend in this stock is still pointing up.
Another high-yield stock on hedge funds’ list of favorites last quarter is Altria Group (MO) . Altria is the prototypical example of a “sin stock.” The $129 billion company generates the vast majority of its revenues from the U.S. cigarette business, with the balance coming from other tobacco products and alcoholic beverages. That exposure to sticky, relatively recession-resistant businesses makes Altria an attractive play for income investors, in spite of some drawbacks in the U.S. cigarette market. Notably, that big income payout has been an important driver of recent outperformance as the Fed prolongs its next rate hike decision.
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Altria’s biggest brand in Marlboro, the leading cigarette label in the country and an asset that throws off considerable cash. Despite that positioning, Altria’s Marlboro is the nicest house in a bad neighborhood, so to speak — the cigarette industry is a declining business here in the U.S., and because Altria spun off its international operations back in 2008, growth isn’t something investors should expect to see in this stock. Because of that, tobacco companies such as Altria are essentially priced largely for zero growth.
Altria has been a prescient investor, however, expanding into new categories such as e-cigarettes and buying up alcoholic beverage brands such as Ste. Michelle Wine Estates as well as a 27% stake in beer brewer SABMiller. Following SABMiller’s pending merger with Anheuser Busch InBev (BUD) , Altria will own 10.5% in the world’s largest brewing company.
That exposure, plus a big dividend check, makes Altria look attractive to Wall Street right now. Hedge funds added 3.5 million net shares of Altria to their portfolios during the second quarter.
Last up on our list of fund favorites is video game publisher Activision Blizzard (ATVI) .
Activision Blizzard is one of the biggest video game companies in the world, with nearly $4.7 billion in sales last year. The firm’s stable of popular flagship franchises includes Call of Duty, World of Warcraft and Destiny. The franchise model for video games comes with some distinct advantages for publishers like Activision: By producing follow-on titles to games that customers are already fans of, ATVI shortens the creative development process and makes it easier to move titles.
The business model of online role-playing games such as Warcraft is immensely attractive for video game publishers. By transitioning from one-time sales to recurring subscription fees, games have the potential to dramatically increase lifetime revenues. That said, it’s been a hard model for Activision to replicate in other franchises — and subscription numbers have slowly been declining. While online gaming only makes up about 18% of total sales today, the prospect of making that model work outside of “MMORPG” titles like Warcraft is compelling, and no other company is more accomplished at making subscription-based gaming work.
Funds have been buying into that prospect too. Last quarter, funds added 110.98 million shares of ATVI to their portfolios collectively, boosting their total ownership of this stock by 21.5%. That’s one of the biggest conviction buys of the quarter — and it makes keeping a close eye on Activision Blizzard a worthwhile move in the weeks ahead. Meanwhile, buyers are clearly in control of ATVI right now, pushing shares to lifetime highs this summer.