Hedge funds have some of the most closely watched stock portfolios, as investors are eager to see what stocks billionaires think are the best to own. WalletHub recently published a report that analyzed the latest SEC filings from more than 400 of the largest hedge funds to determine which stocks are the most popular among hedge fund managers.
With that in mind, here are the 10 most popular hedge fund stocks, as of the third quarter of 2017, and why two sectors make up most of the list.
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- Microsoft Corp. (NASDAQ: MSFT)
- Apple, Inc. (NASDAQ: AAPL)
- Amazon.com, Inc. (NASDAQ: AMZN)
- Facebook, Inc. (NASDAQ: FB)
- Alphabet, Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL)
- Wells Fargo & Co. (NYSE: WFC)
- JPMorgan Chase & Co. (NYSE: JPM)
- Visa, Inc. (NYSE: V)
- Bank of America, Corp. (NYSE: BAC)
- UnitedHealth Group, Inc. (NYSE: UNH)
Tech-heavy hedge funds
The first thing to notice from the list is that the five most popular hedge fund stocks are tech stocks. There are two big reasons for that. First, hedge funds have been investing heavily in the major tech names in recent quarters. In fact, WalletHub's second-quarter report found that seven of the 10 most-bought stocks by hedge funds were in the tech sector.
The second reason is that many of the big tech stocks, including all five that appear on this list, have performed extraordinarily well recently. In fact, the worst-performing tech stock on the list, Alphabet, is up by "only" 33% year to date.
At the end of the second quarter, the financial sector made up the largest percentage of hedge fund assets, and by a significant margin. Now, thanks to the strong performance of these stocks, tech has taken over the top spot.
So, the likely reason for the tech-heavy top 10 is the outperformance of the sector, and of these five stocks in particular. It's not because hedge fund managers are adding to their positions or think these are good stocks to buy now. In fact, tech stocks made up four of the five most-sold stocks by hedge funds during the third quarter, with Apple topping the list.
Betting big on financials?
I mentioned that financials aren't the top sector among hedge funds' stock portfolios anymore, but they're a close second, making up roughly 20% of assets versus 22% for technology. And if you notice in the list above, the sixth- through ninth-largest holdings are all financials.
For starters, financials make up nearly 19% of the S&P 500 and are the second-largest sector, so this certainly makes sense. Still, hedge funds are slightly overweight with their financial holdings.
In addition, financials are expected to be one of the biggest beneficiaries from certain economic and political moves that are anticipated over the next few years. For example, the Federal Reserve is widely expected to raise interest rates several times over the next couple of years, which would likely translate to higher interest margins for banks. And if Republicans are successful in rolling back banking regulations, it could result in tremendous cost savings.
Tax reform is another potential catalyst. Most banks have effective tax rates well over 30%, so dropping the corporate tax rate to 20% could certainly boost profits. In a recent edition of our podcast Industry Focus, host Michael Douglass and myself had a detailed conversation about the catalysts that could propel bank stocks higher over the next few years.
How to use this information
Looking at the top holdings of billionaires and hedge fund managers can certainly be interesting, and can be an excellent source of investment ideas.
However, a more important question is why the hedge fund manager owns the stock, which is impossible to answer with only the information in a 13-F filing. Also important is whether the hedge fund manager thinks the stock is a good value now, if they're simply holding shares, or if they're considering selling some of their position.
Finally, the most important thing is to do your own research before investing in any stock to decide not only whether the stock is an attractive value, but if it fits your risk tolerance and investment goals.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Matthew Frankel owns shares of Apple and Bank of America. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, and Visa. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.