With approximately $6.1 trillion in assets under management, hedge funds have the ability to throw considerable weight around the market. Sometimes it can seem like a herd mentality as the smart money begins buying up the same stocks.
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To find out which stocks the smart money has formed a consensus on, personal finance website WalletHub examined the most recent SEC disclosures filed by more than 400 hedge funds to find their biggest holdings, newest positions, and recent exits. Below are the five most popular stocks owned by the smart money crowd.
Apple (NASDAQ: AAPL) is literally just a few dollars away from becoming the first company to be valued at $1 trillion. If Apple was a country, CNBC says the tech giant would be one of the world's top 20 economies. As the world awaits the introduction of the eighth iteration of the iPhone, it seems only a matter of when, not if, Apple crosses the threshold of that landmark achievement.
Although Apple still generates almost two-thirds of its revenue from the iPhone, its services business is enjoying phenomenal growth and is the segment to watch. It started from a small base, but it's been piling on double-digit growth rates and has become Apple's second-largest segment behind iPhones, generating more than $24 billion in sales last year.
Apple has proven it is more than a one-trick pony, it's understandable why hedge funds have made this the most popular stock.
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2. Berkshire Hathaway
Similarly, it would be a dumb move if the smart money wasn't heavily backing the most successful investor of all time. Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) has set a solid foundation for the portfolios of those who put their faith -- and money -- with the Oracle of Omaha.
Historically, Berkshire has delivered performance beyond that achieved by the market indexes, which, given Buffett's typical disdain for investing in risky stocks, has made his level of outperformance all that more remarkable.
Still, Buffett has grown more comfortable with stocks he once shunned. For example, although once being averse to buying tech stocks, Buffett has been buying up large tranches of Apple stock since last year and today Berkshire Hathaway owns about 130 million shares, giving it a 2.5% stake in the device maker and earning Buffett billions of dollars in return.
While Facebook (NASDAQ: FB) is the third most popular stock among the smart money crowd, they've shown a willingness to pay up for the leading social media platform. Over the first six months of 2017, the period of the WalletHub analysis, Facebook's stock rose 30% while the market itself only gained 7%. Since then, Facebook has padded its lead -- it's now up 50% year to date -- and trades at 37 times trailing earnings and 26 times next year's estimates.
Yet with the social network still expected to grow its earnings at least 26% over the next five years, its multiple is not as excessive as you might think considering the potential for expansion. Because Facebook is positioning itself to capitalize on some major trends, it's a bet that should pay off for years to come.
After gaining for much of 2017, Google parent Alphabet Inc. (NASDAQ: GOOGL) suffered a bit of a summer swoon in June only to rebound in July before succumbing again and trading sideways in August. Still, its performance has justified the bet the smart money placed on it.
Now, however, the tech giant is embroiled in a number of controversies that take away from the growth potential of its ad revenue monetization policies. That revenue continues to climb higher, rising 18% year over year as advertising shifts from television to digital. From the $2.7 billion fine the EU slapped on Google for its search results manipulation to being accused of pressuring a think tank to fire a scholar who applauded the move, there's a lot of sound and fury swirling around Alphabet's policies that's temporarily drowned out its potential.
5. Wells Fargo
But if you're looking for a poster child for scandal, you really can't do any worse than Wells Fargo (NYSE: WFC), the fifth most popular stock among hedge funds. And unlike the others on this list, the banking giant's stock has woefully underperformed and is down more than 7% year to date, whereas rivals like Bank of America (NYSE: BAC) (the sixth most popular stock) is up 8% in 2017.
The numerous sales scandals that have plagued Wells Fargo and beaten down its shares are likely what is causing the smart money to see an opportunity to buy the stock on the cheap. Most of the negative press has been factored into the share price, and it would take another major scandal flaring up again (always a possibility) to weaken it further. If Bank of America can rise again after knowing scandal itself, Wells Fargo can bounce back too.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Apple, Berkshire Hathaway (B shares), and Facebook. The Motley Fool has a disclosure policy.