Hedge Funds Love These 5 Big Stocks -- Should You Too?

These stocks were some of hedge funds' favorite buys in the most recently reported quarter.
By Jonas Elmerraji ,

It's time to follow the money.

While the big stock market indices are still hovering around breakeven this fall, professional investors have had to play favorites in 2015, picking out the stocks they believe will meaningfully outperform everyone else. Following which stocks the pros collectively love the most can be a profitable move for you too.

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 found at the world's most successful hedge funds.

The good news? You don't have to guess to figure out what the pros 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' $21.3 trillion under management.

Even though most funds haven't filed their 13F for the third quarter yet, the early filers provide a sneak peek at the stocks Wall Street is most in love with. Without further ado, here's a closer look at five stocks fund managers love right now.

PayPal

PYPL data by YCharts

By far the biggest new addition to funds' portfolios last quarter was recent payment IPO PayPal (PYPL) - Get Report . Our group of early-reporting funds added 145.7 million shares of PayPal during the quarter, taking on what amounts to a $4.5 billion stake at current price levels.

So does it make sense to grab onto the PayPal bandwagon now that it's a standalone company?

When it was a unit of eBay (EBAY) - Get Report , PayPal carved out an attractive moat as the biggest online payment solution. The firm did more than $70 billion in total payment volume last quarter, a huge dollar share for a payment network that still has very limited exposure to brick-and-mortar retail. As a standalone company, PayPal is working to beef up its presence in physical retail, ramping up its consumer-facing partnerships with major chains such as Home Depot (HD) - Get Report  and Macy's (M) - Get Report , as well as merchant offerings with the PayPal Here credit card readers.

From a financial standpoint, PayPal is in excellent shape. The firm currently carries $6.6 billion in cash and investments on its balance sheet and zero debt. That's almost 15% of PayPal's market capitalization paid for by cash in the bank right now. While shares do carry somewhat of a growth premium right now, a bullish reversal in PayPal's chart in October indicates that sentiment may be shifting in favor of more upside to end the year.

Betting alongside funds in November makes sense here.

Nike

NKE data by YCharts

2015 has been a strong year for shares of athletic apparel stock Nike (NKE) - Get Report . Since the calendar flipped to January, Nike has managed to rally more than 35%. And apparently, fund managers think that positive performance is here to stay. In total, early filers picked up an additional 1.14 million shares of this stock in the last quarter alone.

Nike is the standard-bearer in the athletic apparel business, selling through a network of more than 50,000 retail accounts, plus about 850 company-owned stores and a Web portal. Nike's in-house retail sales efforts are significant; they accounted for about a quarter of total revenue last year. Emerging markets continue to be a huge growth driver for Nike, whose products represent an attainable status symbol for burgeoning middle class populations.

Financially speaking, Nike is another big stock that's in great shape. The firm currently sports $4.2 billion in net cash, which adds up to more than a year's worth of profits. That big cash cushion isn't really enough to move the valuation needle in Nike, but it does give the firm some added flexibility in maneuvering around unexpected financial hiccups.

With shares bumping up against new highs this month, Nike's another name worth following hedge funds into this fall.

Facebook

FB data by YCharts

Facebook (FB) - Get Report  has been a fund favorite for a while now, and that's continuing to be the case in the final stretch of 2015. Last quarter our group of funds added 3.19 million shares of Facebook to their portfolios, a $344 million buy operation at current price levels.

Facebook is the dominant social network, both in terms of dollars generated and in terms of users. The firm boasts more than 1.4 billion monthly active users, making it the single most-trafficked Web site on the internet today. Because everyone a user want to connect with is on Facebook, the firm has built a solid moat as the go-to Web presence and communication platform for most consumers. That huge userbase, and the sheer volume of high-quality data that those users submit about themselves, also adds significant marketing value to Facebook that's yet to be realized on the firm's income statement.

Because most of Facebook's revenue opportunities are still untapped, the firm currently commands a huge earnings multiple. Beyond better ad targeting, Facebook has a huge opportunity overseas, where it sees the most traffic yet generates a tiny minority of revenues. With shares up more than 38% year-to-date and new highs on the way this week, it's pretty clear that buyers are definitively in control of this stock's price momentum right now. More upside is the high-probability trade between now and year-end.

Altria Group

MO data by YCharts

Sin is in this year. Case in point: "sin stock" Altria Group (MO) - Get Report . This $112 billion tobacco giant has seen its share price rally more than 15% since the calendar flipped to January, beating the S&P 500 by double digits over that same timeframe. Add the firm's 4% dividend yield to the equation, and Altria's total returns ramp up to almost 20% this year.

Funds bought into Altria with both hands last quarter, picking up 6.76 million shares along the way.

Altria's biggest business is tobacco. The firm's Marlboro brand is the largest cigarette company in the U.S., and it's the big driver behind those big dividend payouts that Altria dishes out every quarter. The company spun off its international business back in 2008, leaving behind a mature tobacco company that's seeing a slow decline as smoking rates drop. To counter that trend, Altria has invested in other traditional sin stock businesses, buying up Ste. Michelle Wine Estates as well as a 27% stake in beer brewer SABMiller.

That income statement diversification makes Altria a unique tobacco play right now, with one of the biggest offsets to cigarette sales declines. That's been magnified thanks to strength in the alcoholic beverage industry in recent years, as well as an acquisition announced last month for SABMiller. Even so, the company's main cigarette business is seeing a 3% to 4% annual decrease, and Altria basically exists to hand as much value to investors as possible along the way.

The prospect of rising rates could put a squeeze on Altria's dividend-focused valuation in 2016. Shares aren't pointed lower in the near-term, but shareholders should keep a tight leash on this one.

Deutsche Bank AG

DB data by YCharts

Last up on hedge funds' list of favorite stocks is $37 billion German financial firm Deutsche Bank (DB) - Get Report . Early-filing funds added 31.76 million shares of the German bank to their portfolios last quarter, doubling their stakes in this stock and sending the message that Deutsche Bank is a conviction bet for 2015. Notably, Deutsche Bank is the only stock on our list that's been selling off this year. So is the stock ready to stage an about-face in 2016?

Deutsche Bank one of the world's largest commercial banks. The firm's businesses include the typical suite of services, everything from lending to wealth management to investment banking. While Deutsche bank is a global financial firm, it still generates more than a quarter of its revenue in Germany, a fact that makes it a major way to get exposure to the economic ebb and flow in the strongest country in the Eurozone.

The negative relative strength in shares of DB this year is problematic for investors, and it's not likely to turn, particularly given the ongoing strength of the dollar. The Federal Reserve is itching to do something in the next few months, and the likelihood of some kind of combined intervention plan (that is, a small rate hike offset by some kind of stimulus) is becoming a bigger threat to firms such as Deutsche Bank, which hold substantial assets in euros.

This is one stock that I think U.S. investors would best avoid in the next few months.

Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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