Go big or go home -- that's the message that hedge funds are sending in 2017, now that the data are rolling in on funds' favorite stocks from the past quarter.
Funds doubled down on big, blue chip stocks during the quarter, but they were very specific about what they bought. Of the 11 major sectors in the market, financials were the only one that saw a "material" amount of buying last quarter - and even then, funds only upped their stakes by 1.7%.
To figure out which specific stocks hedge funds picked up last quarter, we've got to turn to the SEC filings.
Think of hedge funds' list of favorite stocks 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 because they'll tell you.
That's because institutional investors with more than $100 million in assets are required to file a 13-F, 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 13-F to the SEC.
Want to know which stocks are pro investors' favorites? Those 13-F filings hold the key...
By comparing one quarter's filing to 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 are 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.
The early numbers for the fourth quarter are starting to roll in. Consider this your sneak peek.
Topping hedge funds' list of favorites last quarter was banking giant JPMorgan Chase (JPM) - Get Report -- no surprise there. JPMorgan has been a stellar performer lately, rallying almost 34% on a total returns basis in the last six months. Hedge funds have reacted to that outperformance by buying this bank stock with both hands, early-filing funds picking up another 2.68 million shares during the quarter. That adds up to a $226.8 million buy operation so far at current price levels.
JPMorgan Chase is one of the biggest banks in the world, with more than $2.4 trillion in assets. Like the other big-four banks, JPMorgan operates a diversified financial services business, with operations in commercial and retail banking, asset management and treasury services, and investment banking. That wide range of services gives JPM a massive base of low-cost deposits that it can put to work in other, more lucrative, corners of its business.
The Fed and President Donald Trump have been a couple of important catalysts for JPMorgan's recent rally. Higher rates from the Fed (and pressure from the White House to keep that rake hike pace going) translate into higher net interest margins for lenders, which should translate into meaningful income hikes at big banks like JPMorgan.
JPM has been a popular fund holding for two straight quarters now. Back in 2016, when the financial sector was getting pummeled, JPMorgan Chase was one of the few stocks in the sector that investors were actually buying. Now, with momentum clearly being controlled by the bulls, it makes sense to join the funds in this bank for 2017.
Financial institutions didn't like the tech sector in the fourth quarter -- in the aggregate, tech holdings dropped by 0.6% last quarter, making it the second-worst sold sector during the period. One notable exception to that was Microsoft (MSFT) - Get Report. Early-filing funds bought another 6.65 million shares of Microsoft during the quarter, a $431 million buy operation for funds that have filed their 13-F documents at this point in the month.
As more reporting comes in, expect that Microsoft buying to be even more prominent.
Microsoft is one of the biggest companies in the tech sector, selling everything from software tools to mobile devices to gaming consoles. Despite that broad collection of offerings, Microsoft's Windows operating system and Office productivity suite still provide the lion's share of the firm's profits today. Management is intent on changing that, however. The firm has been pushing its cloud solutions, including Azure, very hard in recent quarters -- at the end of fiscal 2016, Intelligent Cloud made up 27.2% of total revenue.
Financially, there's a lot to like about Microsoft right now. The firm currently carries $41.6 billion in net cash and investments on its balance sheet, enough to cover just shy of 9% of Microsoft's market capitalization at current price levels. That huge cash cushion gives Microsoft options in 2017. Meanwhile, buyers are in control of the price action in this stock right now. Shares are up 14% in the trailing six months, and investors should think about joining the funds on this big tech trade.
It's been a great year to be a Berkshire Hathaway (BRK.A) - Get Report (BRK.B) - Get Reportshareholder. In the last 12 months, this $404 billion holding company has charged 26.5% higher, beating the big market averages by a big margin. Along the way, shares have pushed to new all-time highs, as Warren Buffett and company have tacked another year of outperformance onto Berkshire's track record.
That recent run has made this stock a magnet for fund managers - in the last quarter, our group of early filers picked up 1.65 million shares of BRK.B. That works out to a $271.3 million shopping spree at current price levels.
Berkshire Hathaway owns a wide spectrum of very diverse businesses, ranging from insurance firm Geico to fractional private aircraft ownership company NetJets, to the Burlington Northern Santa Fe railroad. Despite the wide spectrum of businesses, insurance represents a huge share of Berkshire's overall value -- Geico, General Re, Berkshire Hathaway Reinsurance Group and Berkshire Hathaway Primary Group added up to around a quarter of total profits in the most recent fiscal year.
That huge exposure to insurance means that Berkshire is another notable beneficiary when rates move higher. The firm's huge $91 billion insurance float should scale up their contributions to Berkshire Hathaway's income statement materially in the quarters ahead. While the risks of a transition from CEO Warren Buffett and his managing partner Charlie Munger are real, the two have done a stellar job of filling Berkshire's businesses with managers who don't need much input. That fact should give fund managers some comfort as they pile into shares of Berkshire this winter.
The energy sector has been in rebound mode for the last year, and funds are turning to oil and gas supermajor Chevron (CVX) - Get Report as their way to play it at this point. Chevron is one of the largest energy companies in the world, with production of 2.6 million barrels of oil equivalent a day. The firm's proven reserves are in excess of 11.1 billion barrels of oil equivalent, and it's one of a few supermajors that's opted to stay fully integrated, earning a piece of every transaction from pulling crude oil out of the ground to pumping gasoline in consumers' cars.
That decision proves wise during the price rout in oil that kicked off back in 2014. As pure-play exploration and production stocks struggled under the pressure of tumbling oil prices, large firms with midstream exposure were the best protected. That positioning should continue to make Chevron an attractive energy holding for risk-averse investors, particularly as the trajectory of commodity prices remains unclear given current geopolitics.
Funds picked up another 1.78 million shares of Chevron last quarter, adding nearly $200 million in exposure to their portfolios based on current share prices. While Chevron's fundamental story still looks attractive long-term, the technicals have been weakening in the near-term. Wait for CVX to recover from last week's earnings-fueled drop before you look for a buying opportunity.
Last on hedge funds' list of favorites for the most recent quarter is $153 billion health-care giant UnitedHealth (UNH) - Get Report. UNH has been in rally mode since last fall, catapulting higher as the "Trump rally" sent investors buying on hopes that lower healthcare regulation under the new administration could translate into higher profits for UNH. Shares are hovering at all-time highs in January.
UnitedHealth is the biggest managed care provider in the U.S., with more than 46 million heal members under its coverage. This is another situation where scale matters a lot: UnitedHealth's huge size means that the firm can negotiate more attractive contracts with health care providers, keeping costs low and attracting even more members. A huge customer base also helps to spread risks out over a larger population, which keeps underwriting surprises minimal.
Partially in reaction to the Affordable Care Act, UnitedHealth has been investing heavily in growing outside of its core business. More emphasis on highly profitable healthcare IT services, for instance, make the firm even more attractive now. Funds picked up 1.76 million shares of UNH during the most recent quarter, increasing their holdings by $285 million. This stock looks like a smart bet to make alongside the funds -- investors should expect more upside ahead in UNH this quarter.
At the time of publication, author was long BRK.B.