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Investment Ideas

Hedge funds move markets more then you and I could ever dream. The actions that they take in the purchase and sales of equities make the notable headlines you see on a day to day basis. These moves are important to follow and can give investors clues on the future direction of a stock.

According to hedge funds managed over 2.7 trillion of capital in the first quarter of 2016. Approximately $866 Billion of that number is focused on equities and equity strategies, both long and short.

In chart below you can see the top ten new positions from the first quarter 2016 according to Factset. This data allows you to visualize where hedge fund money has been flowing so far this year. These funds aren’t doing this for fun; they expect these stocks to go higher and are putting their money where their mouth is.


The stocks listed below are among the top 50 holdings among the top 50 hedge funds and are Zacks Rank #1(Strong Buy) or #2 (Buy). These stocks are favorites in the hedge fund industry and have plenty of buying power behind them.

Canadian Pacific Railway (CP - Analyst Report) is a Zacks Rank #1 (Strong Buy) that operates a transcontinental railway in Canada and the United States and is the only transcontinental carrier with direct service to the Eastern Seaboard. It transports bulk commodities, including grain, coal, potash, fertilizers, and sulphur; and merchandise freight comprising finished vehicles and automotive parts, chemicals and plastics, crude oil, as well as petroleum, forest, industrial, metals, minerals, and consumer products. The Calgary based company has over 12,000 employees and was founded it 1881.

Canadian Pacific has a market cap of almost $20 Billion, a forward PE of 15 and pays a dividend of 0.80%. The stock sports a Zacks Style Score of “C” in Value and has expected 3-5 year EPS growth of 12.19%. The company reports earnings for Q2 on July 19th, where investors will look for an EPS beat after a 0.55% miss last quarter.

CEO E. Hunter Harrison made some comments yesterday at the Wolfe Research Conference in which he expected the second half of the year to be stronger then the first half, and is hopeful that the company can achieve fiscal year 2016 guidance. These comments are a relief to an industry that has seen carloads down -8.5% year over year according to the Association of American Railroads weekly traffic report on May 21st.

The stock is down 40% from all time highs, since EPS in late April the stock is down around 13%. There is a lot of negativity priced in and investors should look at the company as a good way to enter the hated transportation rail space that is due for a bounce. This space is ranked 184/265 (Bottom 31%) of the Zacks Industry Rank and stock sentiment will quickly turn positive on the first sign of good news.

Hedge funds agree with that notion, with 13 different funds allocating over 2.6 Billion of capital into the stock.

Facebook (FB - Analyst Report) is a Zacks Rank #1 (Strong Buy) that operates a popular social networking website worldwide. The Menlo Park, California based company has over 13,000 employees and was founded in 2004.

The company has a market cap of almost $337 Billion and a forward PE of 42. The stock sports a Zacks Style Score of “B” in Growth and Momentum. Growth is the key for Facebook as it has an expected 3-5 year EPS growth rate of 30.58%. The next earnings report is on august 8th which follows a 29.55% EPS beat last quarter, which caused the stock to surge over 10%.

Hedge funds love Facebook, with over $3 Billion of new money added last quarter, bringing the total amount to $8 Billion invested in Facebook. Looking at the chart below you can see why. The company has been on a steady rise since its IPO and is currently on a streak of three EPS surprises to the upside. Continued earnings momentum should continue to fuel the price higher and bring more funds in on the bid.

Johnson & Johnson (JNJ - Analyst Report) is a Zacks Rank #2 (Buy) that is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The New Jersey based company has over 127,000 empoyees and was founded in 1885.

J&J has a market cap of almost $311 Billion and a forward PE of 17. The stock sports a Zacks Style Score of “B” in Momentum and pays a dividend of 2.82%. Over the next 3-5 years the J&J sees expected growth at 5.73%. Earnings for Q2 are on July 12th where the company will try to beat last quarter’s upside surprise of 2.44%. It hasn’t missed on earnings in over four years, which helped the stock almost double since early 2012.

J&J is a top ten new holding for hedge funds with over $728 Million allocated last quarter. The company’s industry also has a rank of 42 out of 265 (top 16%) in the Zacks Industry Rank.

In Summary

Hedge funds have underperformed the S&P 500 so far this year, but following the stocks the big boys collectively buy can lead to big gains. As long as these stocks continue to attract the smart money, they typically will outperform. Investors should monitor quarterly filings in order to keep up with what stocks hedge funds are buying and selling and adjust their portfolios accordingly.

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