BALTIMORE (Stockpickr) -- It's official: We're kicking off another quarter of earnings season this week. Earnings season is a critical time for investors: It's the one chance each quarter to get full transparency on what's going on behind closed doors at thousands of publicly traded companies.
But while investors fixate on firms' latest filings, they're missing out on another SEC filing season that's shedding light on big moves happening behind the scenes. I'm talking about using a new set of 13F filings to peek at the buying going on in institutional portfolios right now.
What's a 13F anyway?
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.
In total, approximately 3,700 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. 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' $19.3 trillion under management.
Often, funds make very similar trades to one another. And since it's still very early in 13F season, we're able to use a small sampling of early filers to get a sneak peek at what funds are doing before the rest of the forms hit the SEC's servers.
Today, we'll focus on hedge funds' five favorite stocks.
It's not a huge surprise that Apple (AAPL) tops off the list of hedge funds' most-bought names last quarter. Since Apple is the largest publicly traded name on the market, it tends to have the biggest target on its back, both for buyers and for sellers.
But Apple is worth looking at today because it's also a stock that makes sense for conviction buyers. Last quarter, early-filing funds added 2.57 million shares of Apple to their portfolios, a $290 million stake that makes AAPL the most-bought name for the period.
Apple doesn't need much introduction. Besides huge computer and mobile device businesses, Apple also tips the scales as the world's largest music vendor with the iTunes Store. Apple continues to change its business in 2014: at the firm's WWDC keynote last month, executives announced new iterations of the Mac OS X and iOS operating systems that feature a whole new level of integration between devices. It also made some positive structural changes to its stock with a 7-for-1 split.
Despite a nearly 19% rally year-to-date, Apple remains cheap by most valuation metrics: shares trade for just 12 times earnings (ex-cash). And the firm's $133.6 billion in net cash is being used to support share buybacks and dividend payouts that directly return value to shareholders. It makes sense to follow hedge funds into an Apple position this summer.
For another take on Apple, read "Why Apple Shares Remain a Bargain Despite Reaching New Highs."
Twitter (TWTR), on the other hand, is a more surprising technology name to see on hedge funds' buy list. This social media giant has lacked either the fundamental strength or the price momentum that have made Apple look so attractive in 2014. But that didn't stop funds from adding 3.3 million shares of TWTR to their portfolios in the second quarter. What's notable is that, for the funds reporting at this point, Twitter represents a totally new position for them.
Twitter is a microblogging platform that's all about short messages (140 characters or less). With more than 250 million monthly active users, the model has proven popular, and Twitter has slowly been ramping up advertising revenue alongside user growth. The big potential in Twitter comes from untapped revenue streams. Shares rallied hard earlier this month when it was reported that Twitter was beta testing a "Buy Now" button that merchants could place on individual Tweets. Social media stocks may have a fickle relationship with Wall Street this year, but Twitter's best-in-breed revenue per user should entitle it to a premium (even if profitability isn't a major priority just yet).
Like other social networks, Twitter represents a sunk cost for its users; the time and effort spent posting tweets and gaining followers means that users are less likely to jump ship to a rival service. As new revenue generation tools come online, Twitter could quickly grow into its current valuation, but from a technical standpoint, shares remain in a downtrend as I write. It makes sense to wait for that downtrend to get broken before piling into shares along with hedge funds.
For another take on Twitter, read "A 6-Point Prescription for How to Fix Twitter Right Now."
Despite its status as one of the big-four U.S. banks, it's surprising to see Citigroup (C) on funds' buy list in the second quarter. That's because financials were the most sold-off sector overall last quarter, with funds shedding more than 4.7% of their net financial sector investments in total. Still, Citi made funds' list of favorites, with 2.62 million shares bought; that's a $123 million increase at current levels.
Citigroup is a diversified financial stock that's involved with retail and commercial banking, investment banking, treasury services, and a slew of smaller non-core businesses. While the dislocation of Citi's legacy banking business was a precipitating factor in its trouble back in 2008, the firm has renewed its focus on lending again, growing deposits and its loan book in attractive emerging markets like Asia and Latin America. Citi's overseas exposure gives the firm more interesting prospects than its peers as the global economy continues to warm.
Macro factors are one of Citi's biggest share price drivers. Besides economic growth in emerging markets, rising interest rates hold the potential to magnify the firm's profitability as the spreads that Citi collects widen again.
Citi's chart appears to be basing. While price action has been anemic in 2014, look for a move above $51 as a high-probability entry opportunity.
The tech sector was funds' favorite space in the second quarter of 2014, and Google (GOOG), (GOOGL) was another one of the big targets that got bought up en masse. Funds picked up 195,970 shares of GOOG, and another 167,060 shares of GOOGL during the quarter, adding up to a nearly $230 million buying spree at current between class C and class A shares together.
It's easy to forget today that, at its core, Google is a search engine. High-profile products such as the Android mobile operating system, Google Glass, and self-driving cars may get the headlines, but paid search still accounts for around 80% of the firm's revenues. That's thanks to a dominant share in the search business: Google's eponymous site serves approximately six out of every 10 Web searches worldwide. And the mountain of cash that Google earns from paid search provides a huge subsidy for the aforementioned "side businesses" that the firm uses to cement its mindshare among consumers.
After all, by selling smartphones, Google is able to better integrate into its customers' lives, creating much higher switching costs in the process. That economic moat has translated into a mountain of cash: Currently, Google carries more than $53 billion in net cash and investments on its balance sheet, enough to cover close to 14% of the firm's current market cap.
Momentum has been coming back into Google since May. If you want to bet alongside the pros, it looks buyable here.
Last is beverage giant Coca-Cola (KO). Coke was high on hedge funds' buy lists last quarter, with 2.49 million shares picked up among our early group of 13F filers. That's a 50% boost in funds' Coke exposure, boosting their combined positions by $114.75 million at current price levels. And with fundamental and technical factors looking solid for Coke in 2014, it's not hard to see why the pros love this stock.
Coca-Cola is the largest drink-maker in the world. By the firm's estimates, its soft drinks, bottled water, juices and specialty beverages make up an astounding 3% of the 55 billion beverages served each day. The firm's namesake brand enjoys premium status (and pricing), but Coke's reach expands to a wide collection of other labels, including household names such as Sprite, Dasani, Fanta and Powerade. A recent investment in Keurig Green Mountain (GMCR) could also pose a material change in how millions of servings of Coke products reach consumers thanks to the upcoming Keurig Cold.
Despite its size, Coca-Cola has historically been able to secure impressive growth rates. Returns on invested capital have averaged 20% in the last several years, and big investments in emerging economies should keep that overseas outperformance coming for the foreseeable future. As rising middle class populations worldwide help to close the gap between the per capita soft drink consumption here at home and in emerging economies, Coke should be able to keep moving the growth needle.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.