BALTIMORE (Stockpickr) -- The results are in -- and hedge funds' favorite stocks for the first quarter of 2015 may surprise you.
Performance has been hard to come by in 2015, a fact that hasn't been lost on professional investors. By and large, funds' favorite stocks have been big, but there have been some notable exceptions. Likewise, while the majority of funds' buying went to the consumer discretionary and health care sectors, there were some notable exceptions there too.
So which stocks is the smart money buying? For that, we'll have to turn to the financial filings.
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 file a 13F.
Want to know which stocks are pro investors' favorites? Those 13Fs hold the key.
By comparing one quarter's filing with another, we can see how any single fund manager is moving his or her portfolio around. In other words, we can see which stocks are their favorites. 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.
Without further ado, here's a closer look at funds' five favorite names in the aggregate.
Pharma firm Actavis (ACT) - Get Report was drawing considerable investor cash back when we took a sneak peek at funds' favorites last month, and late filers have now pushed Actavis to the top of the pack. Last quarter, funds picked up almost 100 million additional shares, boosting their stakes by more than a third. At current price levels, institutions have a massive $102 billion stake in this big drug stock, making up the vast majority of holders.
Actavis has historically been one of the biggest generic drug manufacturers in the world, but the firm's sales mix shifted dramatically with the acquisition of Allergan this year. Now branded drugs actually make up more than 60% of revenue, led by blockbuster neuromodulator Botox. New indications for Botox should keep the firm's newly-acquired cash cow producing top line results for the foreseeable future.
On the generics side, Actavis still has a substantial pipeline of drugs. The firm is uniquely positioned to develop lucrative biosimilars, and it has huge exposure to overseas markets, where it earns about 40% of generics sales. Obviously, investors can expect Actavis to take some one-time integration costs in the near-term for the Allergan merger, but with shares up more than 16% so far this year, ACT's momentum is clearly being driven by buyers right now.
$200 billion e-commerce giant Amazon.com (AMZN) - Get Report is having a standout year in 2015. Less than halfway through the year, this mega-cap stock is already up more than 35%. And that's no doubt provided plenty of encouragement for funds to pile in. In the first quarter, funds added 10.27 million shares of Amazon to their collective portfolios, a $4.33 billion buying operation at current levels.
Amazon has become the poster child for the benefits of online retail vs. brick-and-mortar stores. Not only does the firm use its scale and low cost structure to move products more cheaply than competing sellers, but it also has gone to great lengths to reduce delivery times, most recently expanding its distribution infrastructure with new hubs in key markets. And while cost isn't a sticky factor for shoppers (once a cheaper retail option comes along, that is), Amazon has used its huge network of 278 million users to introduce valuable offerings such as Prime video content and devices such as the Kindle that consume media.
The result is an ecosystem that extends beyond low cost, making AMZN the most convenient way to shop for a huge swath of the population. Historically, Amazon hasn't been the most profitable name in the tech sector, a consequence of the paper thin margins that it sells merchandise for, and the subsidized prices of electronics. Still, as long as investors are willing to tolerate low margins, AMZN should be able to reap some major margin improvements in the intermediate-term.
As long as this stock's price trajectory continues to move up and to the right, following funds into the AMZN trade looks like a good idea in 2015.
Fund managers doubled down on the pharma sector with Pfizer (PFE) - Get Report last quarter. Actually, Pfizer has been pretty high on pro investors' "buy list" for the last year or so, but the buying intensified last quarter. All told, funds picked up an additional 105.42 million shares of the drug giant. That's a $3.6 billion buying spree at current price levels.
Pfizer is the biggest pharmaceutical firm in the world. The firm owns some of the most successful drugs on the market, including household names such as Lipitor, Viagra, Celebrex and Lyrica. A great deal of that success comes from a hugely effective marketing mechanism. That marketing prowess has helped the firm to minimize sales losses as blockbuster drugs fall off of patent protection. (Lipitor is a perfect example of that here in the U.S.) While generic competition certainly poses a considerable threat, that marketing machine plus a deep pipeline of potential blockbuster drugs should help keep PFE's sales moving higher.
From a financial standpoint, Pfizer is in excellent shape, with more than $10 billion in net cash and investments. That cash cushion accounts for about 5% of Pfizer's current market capitalization right now, and it gives the firm enough wherewithal to handle any unexpected speed bumps it encounters near-term. For investors looking for solid health sector exposure plus a hefty 3.3% dividend yield, PFE is a good bet.
If the Qorvo (QRVO) - Get Report name isn't familiar to you, that's because it's still pretty new in the scheme of things -- shares only began trading back in January. The name may be new, but the company isn't. The firm is the result of a merger between radio frequency chipmakers RF Micro Devices and TriQuint Semiconductor, a pair of firms that have been leaders in the RF solutions space for a long time. QRVO is picking up where they left off -- shares are up almost 14% since the start of this year.
Qorvo manufactures chips that are used in three major segments: mobile, communications infrastructure and aerospace and defense. Not surprisingly, much of this firm's growth in 2015 has come from the mobile chip business, providing things such as power amplifiers, antenna control products and switches to cellular handsets. With the extremely short upgrade cycle in mobile devices right now, demand looks strong for QRVO's components. Even though infrastructure and defense products are a much smaller piece of the revenue pie (they combine to about 23% of sales), they offer some diversification away from the intense competition in the mobile business.
The new name for Qorvo obfuscates institutional ownership a bit. Since this stock used to be two publicly traded companies, all 119.4 million shares reported owned by institutions in the most recent quarter look like a newly initiated position (that's not the case, since most shares were converted from RFMD or TriQuint holdings). But the fact that more than 92% of QRVO's float is held by institutions today makes it a pretty sizable conviction bet here.
Facebook drew about $1.8 billion in institutional cash last quarter as funds picked up another 22.97 million shares of the social network. That big buying operation made Facebook one of just a couple of tech stocks that saw big buying last quarter (on average, funds sold a dollar worth of tech exposure for every dollar they bought).
Facebook is the most popular Web site on the Internet. Users spend more time on FB's pages than any other site. It also holds some of the most valuable demographic information on its users, a fact that dramatically increases the firm's ability to sell ultra-targeted ads at premium pricing. More than 900 million people use Facebook each day, giving it a huge user base that's only being partially monetized right now. As the firm pulls more revenue from its huge utilization, it stands to move the growth needle in a meaningful way.
For instance, the U.S. made up about 45% of Facebook's revenue last year, but U.S. users were only 15% of total web traffic at FB. As under-monetized regions step up closer to rates seen here at home, FB should see significant leverage in its income generation abilities. It looks like the funds got this one right -- Facebook's price trajectory looks bullish right now.
This article is commentary by an independent contributor. At the time of publication, portfolios managed by the author were long FB.