Hedge funds continue to be on the outs due to lagging returns and the high fees they charge. And of course, it takes millions of dollars to even get a sit-down with a hedge fund.
Still, there are ways to “invest like a hedge fund” without having millions of dollars. And there’s something to be said for scouring the ideas from mega hedge funds with billion-dollar research budgets.
Every quarter, the asset management firm Goldman Sachs (NYSE: GS) compiles a list of the stocks that hedge funds love the most. Dubbed the Goldman Sachs VIP list, these are the stocks that appear most frequently among the top 10 holdings of hedge funds.
Goldman Sachs has even launched an ETF to track its VIP list. Since inception, the Goldman Sachs Hedge Industry VIP ETF (NYSE: GVIP) has outperformed the S&P 500 by three percentage points.
The top 10 in the VIP list for the fourth quarter of 2016 includes some very popular stocks — notably the Google parent Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), Amazon.com, (NASDAQ: AMZN) and Facebook (NASDAQ: FB).
Yet, there are better opportunities than just the well-covered names above. I’ve done the leg work of digging through the Goldman VIP list to find the three best stocks to help investors selectively follow the smart money. Here is my take on the three top hedge fund stocks from the Goldman Sachs VIP top 10 list:
Top Hedge Fund Stocks: Bank of America (NYSE: BAC)
Among the notable billionaire hedge fund managers adding Bank of America to their portfolios during the fourth quarter are Stephen Mandel’s Lone Pine Capital and Dan Loeb’s Third Point.
Good company for current Bank of America shareholders, but why the sudden hedge fund interest? Bank of America could be a big winner from rising interest rates. And the Federal Reserve is getting more aggressive with rate hikes after seven years of near historical low rates. We could see another interest rate hike as soon as this month.
These higher interest rates mean Bank of America can make even more on its massive deposit base. Bank of America has an impressive wealth management base thanks to its purchase of Merrill Lynch during the financial crisis. Bank of America’s wealth-management business will do well with rising employment and strengthening economy.
Bank of America is also one of the cheapest banks around. The stock is trading right at book value, a hefty discount to both JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC).
Investors also get a 1.2% dividend yield, which is underrated and growing. The bank has increased its dividend for three straight years and still pays out less than 20% of its earnings in the form of dividends. That’s something that investors and hedge funds alike can appreciate.
Top Hedge Fund Stocks: Microsoft (NASDAQ: MSFT)
Some of the biggest names in the hedge fund world have been buying up shares of Microsoft. Last quarter we saw Tiger Global and Viking Global — each run by billionaires — buying up shares. The tech giant is successfully transforming its business to emphasize services and subscriptions, a transition that should lead to higher margins. Of note, Microsoft’s Azure platform is now the second largest public cloud vendor, behind only Amazon.
CEO Satya Nadella’s arrival a couple of years ago ushered in the new era of growth for Microsoft. Hedge funds are taking notice; there’s the promise that software like Office 365 and revamped Windows 10 will continue to do well. Microsoft is another major dividend payer, offering a 2.4% dividend yield. It has a solid 13-year streak of consecutive dividend increases.
Top Hedge Fund Stocks: Charter Communications (NASDAQ: CHTR)
Several billionaires increased their stakes in Charter Communications last quarter. These include Ken Griffin’s Citadel Advisors, Chris Hohn’s TCI Fund and Larry Robbins’ Glenview Capital. Why the marked hedge fund interest? Heading into the fourth quarter, Charter officially completed its Time Warner Cable and Bright House Networks mergers. It’s now the third-largest U.S. video program distributor with some 26 million customers. The two major deals add impressive economies of scale for the cable provider.
For investors getting involved now, the upside lies in continued integration of Time Warner Cable and Bright House. It’s a big opportunity for Charter to update the legacy systems to all-digital and up-sell its now-enlarged subscriber base on boosted internet speeds and interactive value-add services.
In the end, investors can capitalize on hedge fund research budgets and idea generation capabilities. The Goldman Sachs’ VIP list is a great place to dig for ideas. These three top hedge fund stocks above are the most interesting opportunities among recent hedge fund favorites.