A Trio of Hedge Fund Favorites

03/20/2017 2:50 am EST


Marshall Hargrave

Contributing Editor, Wyatt Investment Research

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, suggests Marshall Hargrave, editor of Wyatt Research's Daily Profit.

Every quarter, Goldman Sachs (GS) compiles a list of the stocks that hedge funds love the most; 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 (GVIP) has outperformed the S&P 500 by three percentage points.

I’ve done the leg work of digging through the list to find the best stocks to help investors follow the smart money. Here is my take on the three the most interesting opportunities among recent hedge fund favorites.

Bank of America (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.

Why the sudden hedge fund interest? Bank of America could be a big winner from rising interest rates as 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. It is also one of the cheapest banks around.

Investors also get a 1.2% dividend yield, which is underrated and growing. It 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.

Microsoft (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. Microsoft is another major dividend payer, offering a 2.4% dividend yield. It has a solid 13-year streak of consecutive dividend increases.

Charter Communications (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.

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.

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