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.