BALTIMORE (Stockpickr) -- Hedge funds are on a tech buying spree in 2014. No, I don't mean that fund mangers are taking the day off on Friday so they can be home when their new iPhones get delivered. Instead, it's a small group of big tech stocks that are getting hedge fund money thrown at them.
In fact, only two sectors saw real conviction buying from institutional investors last quarter: consumer staples and technology.
It's not surprising that institutional cash mostly made the biggest bets on large-cap tech stocks, but some of their favorite names in the sector are a little surprising. So, which names are pro investors piling into? And which still make sense to buy now?
Today, we'll answer both of those questions by peeking at the latest round of 13F 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.
In total, approximately 3,800 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' $20.5 trillion under management.
Today, we'll focus on hedge funds' 5 favorite tech stocks.
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Up first is internet giant Google (GOOG) . In theory, GOOG just became available for trading last quarter, when the firm changed the ticker symbol of its Class A shares to GOOGL and issued its new Class C shares under the more familiar GOOG symbol. For that reason, a big chunk of the 225.6 million shares funds added to their Google bets last quarter came from a convoluted share structure change -- it wasn't all new buying. But the nearly $130 billion in this tech stock still warrants a closer look today.
In spite of technologies such as Android, Google Glass and Chromebooks, Google is, at its core, still an Internet advertising company. That's because search ads still contribute more than 80% of Google's revenues today, making everything else Google does either a side business or a hobby. But Google is making the right move by throwing businesses at the wall until something sticks; the firm's huge cash generation gives it that luxury, and new tech keeps users coming back to its suite of offerings. As I write, Google currently draws approximately 60% of the world's search traffic.
From a financial standpoint, Google is in excellent shape. The firm has $58.4 billion in net cash and investments, which is more cash than management knows what to do with right now. As long as Google can keep from overpaying for acquisitions (management has been adept so far at getting more value than it paid, despite some shaky initial deal terms), then shareholder value should remain intact.
Bear in mind that this stock isn't cheap for big tech exposure. There are other names that deserve first billing today.
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One tech stock that does deserve top billing today s is Apple (AAPL) . That's because, believe it or not, Apple still trades at a discount. That's a big part of the 44.4 million Apple shares that hedge funds piled into last quarter. At current levels, that's a $4.5 billion bet on the Cupertino, Calif.-based tech giant.
Apple is just coming off the heels of a big product announcement earlier this month. The iPhone 6 and iPhone 6 Plus have already broken sales records, with more than 4 million phones sold in the first 24 hours. That's double what the iPhone 5 was able to do. Of course, the upcoming Apple Watch is predictably getting a wide spectrum of buzz.
But it's Apple Pay that has the potential to be a sleeper homerun for Apple. Details recently emerged that banks will be sharing their swipe fees with Apple, a deal that they largely see as a net benefit because of the higher security of the electronic wallet. We'll get an early indication in the months ahead; Apple Pay officially launches in October.
Cash is another big sticking point at Apple. The firm has $133.47 billion in net cash and investments, but unlike Google, it isn't having trouble putting it to work despite a historic aversion to large M&A deals. Instead, the firm plans to boost shareholder yield by continuing to pay out its 1.86% dividend, and by ramping up stock buybacks to the tune of $90 billion. I think it makes sense to buy alongside the pro investors this month.
As of the most recently reported quarter, Apple was one of Carl Icahn's top holdings and also showed up in David Einhorn's Greenlight Capital portfolio. I featured Apple recently in "It's Not Too Late to Buy Apple -- but Hurry Up."
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Fund managers are making an interesting bet in shares of Baidu (BIDU) right now. Firms piled into the Chinese-language internet search site, picking up 7.13 million shares last quarter, and bringing their total stakes in BIDU to $42.6 billion. Ironically, the firm known as "the Chinese Google" has actually fared a lot better than the real Google year-to-date: since the calendar flipped to January, BIDU is up 21%, while Google's shares have only managed to move 3% higher.
Baidu's is the incumbent search provider in the People's Republic. The site enjoys more than 79% of the market share for internet search in China, and it owns more than 30% of the overall internet advertising market. BIDU has a big moat in its expertise in dealing with the Chinese market. With Google's exit from China in 2010, one of its biggest competitors basically sent a conspicuous message to other Western search providers that doing business in China wasn't worth the trouble, limiting the chances that someone else will take Google's place (and market share).
BIDU is another cash-rich name, with $26.17 billion in net cash and investments. That's enough dry powder to pay for 34% of Baidu's current market capitalization, a big risk reducer, particularly in the context of ongoing drama with Chinese equities and economic concerns over China in general. While Baidu is a higher-risk name than Google, it's frankly a more interesting name to own, and its cheaper on an ex-cash basis as well.
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Software company Adobe Systems (ADBE) has changed the way it does business for the better. The firm, which develops and sells high-end content creation software, has had a two-pronged challenge to its business: convincing customers to pay to upgrade their software regularly, and keeping piracy of the firm's pricey software at bay. In one fell swoop, Adobe's new model has solved both of those problems.
Adobe's software titles include iconic content creation tools ranging from Photoshop to Acrobat to Dreamweaver. And while the firm has had great success in establishing itself as the platform of choice among creative professionals, the high cost of a legal copy of its software has been a hindrance, particularly for small businesses. Adobe changed that with the introduction of the Creative Cloud, a subscription model that provides the latest version of its software to users at a low monthly cost. That lower barrier to entry for small business should be an important driver of user growth; instead of paying thousands of dollars for a license to Adobe's Creative Suite, Creative Cloud access can cost as little at $50 a month.
Long-term, that's a better deal for Adobe too. With a subscription model, it books recurring revenues from a sticky user base with high switching costs. Adobe is above breakeven under its new model, and profitability should ramp up quickly from here. The firm aims to have 4 million paid subscribers in 2015. And hedge funds agree that it'll hit that goal -- that's why they picked up 8.91 million shares of the software company last quarter, a $604 million bet at current price levels.
Adobe is one of the top holdings at Steve Mandel's Lone Pine Capital as of the most recently reported quarter.
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Last up is real estate website Zillow (Z) , a tech name that's simply been on fire in 2014. Since the first trading session in January, Zillow's share price has rallied more than 63%. And with a hot stock valuation, the firm is buying its way bigger with big acquisitions like the deal to buy long-time competitor Trulia (TRLA) for $3.5 billion, all in stock.
Zillow's unique selling proposition is its "Zestimate", which provides value estimates for approximately 110 million homes in the U.S. That's a huge draw, considering that, for most consumers, a home is the biggest asset a family owns. The Zestimate also provides a baseline for real estate buyers thinking about moving to a new area – and that's the big draw, because it means that Zillow can serve targeted advertising that puts homebuyers and renters in touch with related products and services they're looking for. And that's how Zillow gets paid.
Despite being, by far, the smallest name on hedge funds' list of favorite stocks (Z has a market cap of just $5.8 billion), it's clearly one of the most exciting names in the sector right now, and management's smart acquisition plan should pay off once consolidation pains are worked out. Funds bought 3.19 million shares of Zillow last quarter, increasing their bets on the firm by more than 10%. That's a big conviction bet from the pros -- and investors who aren't risk-averse could do worse than to invest alongside them.
As of the most recently reported quarter, Zillow was one of the top holdings at Chase Coleman's Tiger Global Mangement.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.