In this article, we will take a detailed look at the 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Analysts at BofA Securities recently published a list of “best of breed” stocks for the third quarter of 2024, which they believe are the top choices for investors on the back of their high quality, liquidity, earnings growth and margin upside when compared with peers. BofA’s “best of breed” basket of stocks has reportedly outperformed the MSCI All Country World Index (NASDAQ:ACWI) by 584 basis points, and returned a whopping 470% since its inception in April 2010.
Bank of America analyst Michael Hartnett thinks these best of breed companies have strong balance sheets, cash flow and high EPS growth as well as competent management. Hartnett believes these companies generate the “best relative returns” in the long term and can protect investors against short-term volatility.
For this article we scanned BofA’s best of breed basket of stocks and picked 10 companies with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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10. NetEase Inc (NASDAQ:NTES)
Number of Hedge Fund Investors: 41
Chinese internet company NetEase Inc (NASDAQ:NTES) also made it to the list of the best of breed stocks to buy according to Bank of America. Last month the company reported strong Q1 results. Adjusted EPADS in the quarter totaled $1.84, surpassing estimates by $0.12. Revenue jumped 7.2% year over year to $3.7 billion, meeting estimates. While NetEase Inc (NASDAQ:NTES) gaming division still makes up most its net sales, analysts believe the Cloud music, Youdao (search business) and Innovative businesses segments could grow in the future. NetEase Inc (NASDAQ:NTES) has several new games planned for the coming months and years, including Once Human and Marvel Rivals, which are creating a lot of excitement.
While NetEase Inc (NASDAQ:NTES) continues to grow, its growth rate isn’t as high as many had expected. During the first quarter, the growth rate was modest mainly because of lack of any new game releases in the period. The gaming segment’s gross margins jumped 280bps from a year-ago quarter to 69.5%, driven by NetEase Inc (NASDAQ:NTES) expansion on new platforms. As of the end of the first quarter, NetEase Inc (NASDAQ:NTES) has about $6 billion in cash and just $60 million in long-term debt. It also has $12.4 billion worth of time deposits, which are considered cash items, maturing in less than 12 months.
Polen Emerging Markets Growth Strategy stated the following regarding NetEase, Inc. (NASDAQ:NTES) in its first quarter 2024 investor letter:
“NetEase, Inc. (NASDAQ:NTES) is one of the top players in China’s video game industry and saw decent revenue growth in 2023, particularly in its games division, with profit growth close to 20%. The stock also continues to recover after gaming restrictions announced last quarter in China were not nearly as bad as first feared.”
9. Monster Beverage Corp (NASDAQ:MNST)
Number of Hedge Fund Investors: 43
BofA added MNST in its list of best of breed stocks. Monster Beverage Corp (NASDAQ:MNST) is one of the biggest names in the energy drinks market, which is expected to grow at a CAGR of 8.4% through 2030 in North America while growth in emerging markets like Asia would be even stronger. Monster Beverage Corp (NASDAQ:MNST) has a big advantage in distribution over competitors thanks to its deal with Coca Cola. While strong competition from Celsius has been a concern among investors, Monster is in a much strong position to offset any risks via acquisitions and aggressive marketing and product launches. Monster Beverage Corp (NASDAQ:MNST) market cap is $52 billion, while Celsius’s market cap is just $13 billion. Analysts believe Monster Beverage Corp (NASDAQ:MNST) is operating in the non-cyclical energy drinks industry and its per-can price isn’t a burden on the customer’s pocket despite inflation. During the first quarter, Monster Beverage Corp (NASDAQ:MNST) margins came in at a healthy 23%, while its international business grew 19.5% and accounted for about 39.2% of total sales.
Monster Beverage Corp (NASDAQ:MNST) current P/S ratio of 6.57 is 20% below its five-year average while its forward P/E of 27.82 is 19.5% below its five-year average. Over the next five years, Wall Street expects Monster Beverage Corp (NASDAQ:MNST) to see earnings growth of 14% on a per-annum basis. Amid growth of international sales and expansion into new areas Monster Beverage Corp (NASDAQ:MNST) stock seems to have more upside. Average analyst estimate set by Wall Street on the stock is $61, which presents a 22% upside potential from the current levels.
8. Howmet Aerospace Inc. (NYSE:HWM)
Number of Hedge Fund Investors: 44
HWM is one of the stocks in BofA’s best of breed stocks list. Howmet Aerospace Inc. (NYSE:HWM) is soaring after the company upped its earnings estimate for the year on the back of rising demand. Howmet Aerospace Inc. (NYSE:HWM) revenue in the first quarter jumped 14% year over year. Howmet Aerospace Inc. (NYSE:HWM) is well-diversified and can offset slowness in different market segments of the industry. Its business spans across Engine Products, Fastening Systems, Engineered Structures and Forged Wheels. During the first quarter the company generated FCF of $95 million, while it has $533 million in cash and cash equivalents, more than enough to pay the $205 million debt maturing this year.
During the Q1 earnings call the company talked in detail about guidance and effects of Boeing-related headwinds on its business:
Demand for air travel continues to be very strong. And if anything, will be constrained during the summer season by the availability of new aircraft, especially narrow-body aircraft. Asia-Pacific travel, which has been lagging the U.S. and Europe has been increasing rapidly. And is now back to approximately 90% of pre-pandemic levels. International Asia-Pacific travel was up approximately 50% in the recent months and speaks well to future aircraft demand especially wide-body aircraft.
Freight requirements also continue to be robust. The one item that needs to be set out is the fact of the FAA restrictions on the Boeing 737 MAX production of 38 per month in the light of continuing quality problems at Boeing. These facts are extensively reported in the press and have resulted in lower production, well below the prior levels of approximately 30 aircraft per month, which in itself was well below the 2023 targets of 38 aircraft per month. Clearly, the prospect of going up to rate 42 and rate 47 per month is now unlikely in 2024. This has caused Howmet Aerospace Inc. (HWM) to completely replan our year. And we’ve concluded that a further reduction in build to approximately 20 aircraft per month average for the year is a more secure assumption than that previously reported of 34 aircraft per month.
Read the entire earnings call transcript here.
Average analyst price estimate on the stock is $85.95, which presents a 10% upside potential from the current levels. Wall Street expects Howmet Aerospace Inc.’s (NYSE:HWM) earnings to grow 30.40% this year, 20% next year and 22% on average for the next five years on a per-annum basis. Based on these growth estimates, the stock’s P/E of 32 is justified.
7. Snap Inc (NYSE:SNAP)
Number of Hedge Fund Investors: 45
BofA added Snap Inc (NYSE:SNAP) in its list of best of breed stocks. Over the past one year, SNAP shares have gained about 50% in value. Snap Inc (NYSE:SNAP) has been a surprising rebound story over the past few months as Snap Inc (NYSE:SNAP) earnings and growth have surprised analysts. Snap Inc (NYSE:SNAP) is fast becoming an AI stock that needs more attention than it’s currently getting. Snap Inc (NYSE:SNAP) has integrated ‘My AI’ chatbot with its app and it’s getting a lot of traction. The bot helps Snap Inc (NYSE:SNAP) users plan trips, answers questions, makes customized recommendations and much more. Snap Inc (NYSE:SNAP) also revealed a feature that would allow creators to convert any text prompt into a “lens.” Snap Inc (NYSE:SNAP) is also investing heavily in machine learning to increase engagement on its platform. New features like Creative templates, longer video formats will increase engagement on Snapchat, analysts believe.
Snap Inc’s (NYSE:SNAP) Q1 results show the growth trajectory the company is on. Time spent on Spotlight, Snapchat’s short viral videos feature, jumped 125% year over year in the first quarter. Snapchat+, Snap’s subscription service that unlocks special features on the app, tripled to nine million in the March quarter. Small and medium-scale advertisers on the platform jumped 85% on a YoY basis. Snap Inc (NYSE:SNAP) earnings are expected to continue seeing growth on the back of AI and core business growth catalysts. Wall Street expects Snap Inc (NYSE:SNAP) to post an EPS of $0.25 this year and $0.43 next year. Earnings growth is expected at over 70% next year.
RiverPark Large Growth Fund stated the following regarding Snap Inc. (NYSE:SNAP) in its first quarter 2024 investor letter:
“Snap Inc. (NYSE:SNAP): SNAP was our top detractor in the quarter despite reporting fourth quarter results generally in line with or better than expectations. Revenue growth of 5% was roughly in line with investor estimates and at the high end of guidance, and EBITDA of $159 million was $49 million better than estimates. Daily Active Users (DAUs) were also ahead of investor expectations, ending the quarter at 414 million (about 2 million better), driven by continued innovation in Snap’s offerings. Revenue guidance for 1Q24 was also roughly in line with investor estimates, but EBITDA guidance of negative $55-95 million was well below estimates. The company pointed to increased infrastructure costs and a US focused marketing campaign for the lower-than-expected margin guidance.
Although the company continues to face near-term macro headwinds, we believe SNAP can accelerate its revenue growth over the next several years. With 2023 revenue expected to be $4.6 billion (as compared with Meta’s $134 billion), we believe SNAP has a long runway for both revenue growth and expanded profitability as it improves platform functionality, continues to grow its audience (daily active users continue to grow at a double-digit rate), and expands its monetization.”
6. Palantir Technologies Inc (NYSE:PLTR)
Number of Hedge Fund Investors: 45
Palantir is one of the notable AI stocks in BofA’s best of breed stocks list.
Wedbush analyst Dan Ives said in a latest note that Palantir Technologies Inc(NYSE:PLTR) is one of the stocks that can benefit from the “AI party” that is just getting started. Ives counted Palantir Technologies Inc(NYSE:PLTR) among the stocks that will ride the AI wave thanks to their “massive installed bases” in both the enterprise and consumer spaces.
Last month, Wedbush’s Dan Ives said the latest selloff around Palantir Technologies Inc (NYSE:PLTR) was a “golden” buying opportunity. Ives has an Outperform rating and a $35 price target on Palantir Technologies Inc (NYSE:PLTR). Palantir Technologies Inc (NYSE:PLTR) is trading at a high P/E multiple of 170, which has alarmed many. However, Palantir Technologies Inc (NYSE:PLTR) bulls believe Palantir Technologies Inc’s (NYSE:PLTR) consistent contract wins from the government and AI-related growth catalysts justify this multiple. Analysts are bullish on Palantir Technologies Inc’s (NYSE:PLTR) AI platform (AIP), which helps companies and governments in decision making based on AI technologies. In the first quarter alone, Palantir Technologies Inc (NYSE:PLTR) saw a 16% YoY increase in government contracts. US government revenue jumped 12% year over year.
Palantir Technologies Inc (NYSE:PLTR) has increased its U.S. commercial sector growth outlook to 45% from an initial estimate of 40%. Palantir Technologies Inc (NYSE:PLTR) is expected to report sales growth of 20% next year according to Wall Street estimates. The stock is trading at 54X its 2025 EPS estimate of $0.39, which is justified based on the strong growth trajectory.
Carillon Scout Mid Cap Fund stated the following regarding Palantir Technologies Inc. (NYSE:PLTR) in its first quarter 2024 investor letter:
“The top contributor to return for the quarter was Palantir Technologies Inc. (NYSE:PLTR). Sentiment improved on Palantir after it reported stronger than expected commercial customer revenue and free cash flow. U.S. commercial growth was especially encouraging, as U.S. commercial revenue was up by a large percentage year over year for the fourth quarter and U.S. commercial customer count grew nearly as much. We expect Palantir to become one of the premier artificial intelligence (AI) software providers, built on its Foundry and AIP platforms.”
5. Edwards Lifesciences Corp (NYSE:EW)
Number of Hedge Fund Investors: 47
Medical technology company Edwards Lifesciences Corp (NYSE:EW) is one of the best of breed stocks to buy for the third quarter according to Bank of America. Edwards Lifesciences Corp (NYSE:EW) is one of the leaders in the transcatheter heart valve replacement. During the first quarter, its transcatheter aortic valve replacement (TAVR) revenue rose 6%, while transcatheter mitral and tricuspid therapies (TMTT) sales jumped a whopping 75%.
Earlier this month, Goldman Sachs added the stock to its Conviction list, saying Edwards Lifesciences Corp (NYSE:EW) is a pioneer in the transcatheter aortic valve replacement (TAVR). Goldman expects Edward Life Sciences Inc (NYSE:EW) to be successful in its product cycle transition.
Carillon Scout Mid Cap Fund stated the following regarding Edwards Lifesciences Corporation (NYSE:EW) in its first quarter 2024 investor letter:
“Edwards Lifesciences Corporation (NYSE:EW) was the third-largest contributor. Edwards designs, manufactures and markets products such as heart valves to treat cardiovascular disease. The stock performed well after a competitor delayed, and potentially cancelled, its entry into the aortic heart valve replacement market. Edwards also received approval from the U.S. Food and Drug Administration for its tricuspid valve replacement product much sooner than expected. We continue to find the company’s market position and growth opportunities attractive.”
