We have noted before that over the past couple of years hedge fund performance, especially by some of the bigger funds, has trailed overall market performance. Part of the problem for some of the funds, especially those that are long/short, is that market volatility, for the most part, has remained tepid, and with the exception of a spike back in February, is back trading at the levels we saw for much of the past few years.
Despite the underperformance of some managers, the holdings of the top hedge funds are always of interest to investors, and with good reason. Since portfolio managers tend to talk amongst themselves, good ideas get spread around and often end up in many portfolios.
A recent Merrill Lynch research report tracks the 20 most overweight S&P 500 stocks that hedge funds own. The analyst calculates the relative weight of the companies by hedge funds’ weight of net exposure divided by the S&P 500 weight. Here we present the top five companies in order of the highest weighting.
NRG
This stock has made a nice run off the lows, but it may hold solid upside for aggressive accounts. NRG Energy Inc. (NYSE: NRG) is an integrated independent power producer that owns and operates 27 gigawatts (GW) of conventional and renewable generating capacity in the United States and serves 3 million retail customers in Texas and the Northeast.
NRG derives revenue from the sale of electricity in the wholesale and retail markets and the sale of capacity. The company also owns a 64.5% interest in NRG Yield, a publicly traded, dividend growth-oriented company that owns 5 GW of long-term contracted renewable assets.
NRG investors receive a 0.35% dividend. The Merrill Lynch price target for the Buy-rated stock is $40, while the consensus target is $39.17. The stock closed Thursday at $34.13.
Arconic
This company gives investors a play on commodity pricing and demand. Arconic Inc. (NASDAQ: ARNC) engineers, manufactures and sells lightweight metals of aluminum, titanium and nickel worldwide. It operates through three segments: Global Rolled Products, Engineered Products and Solutions and Transportation and Construction Solutions.
The company has in place a multiyear supply deal with Toyota North America. Arconic is supplying aluminum to Toyota for its Lexus RX. The vehicle has become Toyota’s first in North America to prominently feature aluminum exterior panels.
Investors receive a 0.9% dividend. Merrill Lynch does not cover the company. The consensus target price is $23.60, and shares closed Thursday at $20.77.
IQVIA
This off-the-radar stock has been gobbled up by managers. IQVIA Holdings Inc. (NYSE: IQV) is a leading global provider of information, technology solutions and contract research services. The company is the world’s largest contract research organization (CRO) and the largest source of drug utilization data.
IQVIA is focused on using data, advanced analytics and science to help health care stakeholders find better solutions for patients. The company has more than 55,000 employees serving clients in over 100 countries worldwide.
Merrill Lynch recently upgraded the shares to a Buy rating and mentioned this in the report:
We raise our estimates and upgrade IQVIA from Neutral to Buy on improving growth trends. We believe that IQVIA’s organic growth is set to increase driven by its high contract win rates and capital deployment. CRO industry fundamentals are positive and also provide a favorable backdrop for growth.
Merrill Lynch raised the price target to $135 from $112, while the consensus target is $129.38. Shares ended Thursday at $121.70.
Incyte
This top mid-cap is rumored to be in the sights of a larger biotech company. Incyte Corp. (NASDAQ: INCY) has a current validated approach in hematology-oncology, and there’s reason to believe the three wholly owned clinical-stage assets the company has could drive several billion in revenue, something important for an acquiring company looking to acquire assets. Many on Wall Street are bullish on the company’s rich pipeline of small molecule therapies in all stages of development, and they see the company as a key player in the cancer space.
Incyte focuses on the discovery, development and commercialization of proprietary therapeutics in oncology. It offers Jakafi for the treatment of myelofibrosis and polycythemia vera cancers. The company’s commercial products also include baricitinib for rheumatoid arthritis, which was approved in early June by the FDA.
Merrill Lynch rates the shares at Buy with an $83 price target. The consensus target is $84.37, and the stock closed on Thursday at $64.38.
Transdigm
This stock has had a very solid 2018 and is a favorite valuation play at Merrill Lynch. Transdigm Group Inc. (NYSE: TDG) is a holding company for different businesses that provide a diverse array of products, including ignition systems, pumps, valves, motors, actuators, controls, water faucets and systems, quick disconnects and couplings, batteries, chargers and power conditioning, cockpit security systems, composites and elastomers, audio systems, and lighting and displays.
The company has a unique position among the defense companies as 90% of sales are proprietary, 75% are sole-sourced and 54% are aftermarket-related. While earning missed slightly for the fiscal third quarter, revenues were up 9.2% to the analysts’ estimates.
The $360 Merrill Lynch price target is less than the $370.67 consensus target. The stock closed Thursday at $359.38.
These are five stocks that the top hedge funds are buying, none of which is an overbought and crowded tech stock. They all make good sense for growth accounts with some risk tolerance.
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