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.”
4. Shopify Inc (NYSE:SHOP)
Number of Hedge Fund Investors: 65
BofA added Shopify Inc (NYSE:SHOP) to its list of the best of breed stocks for the third quarter of 2024. Wall Street continues to shower positive ratings and comments for the Canadian ecommerce store platform Shopify Inc (NYSE:SHOP). Last month, Goldman Sachs analyst Gabriela Borges upgraded the stock to Buy from Neutral and increased their price target for SHOP to $74, saying Shopify Inc (NYSE:SHOP) investments in marketing are “about to pay off” and will drive revenue growth into 2025.
Earlier this month, JPMorgan started covering the stock with an Overweight rating. Analysts at JPMorgan said Shopify Inc’s (NYSE:SHOP) competitive advantages include product breadth, ease of use and scale. These moat points, according to the bank, will keep powering Shopify’s “industry-leading” growth.
While Shopify Inc (NYSE:SHOP) results were strong and better than expected, Shopify Inc (NYSE:SHOP) weak guidance threw water on the enthusiasm around the stock as it fell sharply. SHOP is down 12% so far this year. Analysts believe this is a buying opportunity and that the reaction to guidance was overblown. The weak guidance came amid the effects of Shopify’s Inc (NYSE:SHOP) sale of logistics business and because of latest pricing changes. Shopify’s Monthly Recurring Revenue, or MRR, has been showing strengths over the past several months and the company is expected to maintain its 20%+ revenue growth rate in the second quarter, while Shopify Inc’s (NYSE:SHOP) Gross Merchandise Value (GMV) and international growth remains strong. Wall Street expects the company’s earnings to grow 28.60% next year and at about 50% over the next five years on a per-annum basis. Based on these growth estimates, the stock’s higher P/E is justified.
Brown Capital Management Mid Company Fund stated the following regarding Shopify Inc. (NYSE:SHOP) in its fourth quarter 2023 investor letter:
“Among the top contributors for the fourth quarter were Shopify Inc. (NYSE:SHOP) and Manhattan Associates (MANH). Shopify is the second-largest cloud-based e-commerce software platform in the U.S., with 10% market share. Shopify provides upstarts and Fortune 500 companies alike with turnkey solutions to help individuals and businesses run their online stores. The range of services includes web design, inventory management, payment processing, analytics and reporting, among others. We believe the company is the most attractive alternative to Amazon and has an addressable market greater than $150 billion.
Shopify released stellar results this quarter, growing revenue 25% with meaningful margin expansion and management indicating more to come. Notably, the third quarter was Shopify’s first full quarter after deciding in May 2023 to abandon its in-house fulfillment and logistics ambitions which put significant pressure on margins. Additionally, competitive concerns from Amazon’s “Buy With Prime” initiative that launched in April 2022 also abated. The feature allows merchants selling outside of Amazon to access its fulfillment network and enjoy Prime benefits such as free deliveries and returns, posing a threat to Shopify’s payment-processing revenue. Instead of duking it out, Shopify and Amazon reached a partnership agreement in September that preserves customer choice and, to our knowledge, keeps Shopify’s payment revenues intact. With these key concerns in the rear-view mirror, Shopify should have a clear path to double-digit revenue growth and margin expansion for years.”
3. Intuitive Surgical Inc (NASDAQ:ISRG)
Number of Hedge Fund Investors: 79
While Intuitive Surgical Inc (NASDAQ:ISRG) valuation has concerned many, Bank of America called the robotic surgery-focused Intuitive Surgical Inc (NASDAQ:ISRG) a best of breed stock for the third quarter in a latest report. Intuitive Surgical Inc (NASDAQ:ISRG) bulls believe the stock is poised for long-term growth as robots will play a key role in surgeries and the broader healthcare industry in the coming years. During the first quarter, Intuitive Surgical Inc (NASDAQ:ISRG) procedure volume, which shows the number of surgical procedures carried out by Intuitive Surgical Inc (NASDAQ:ISRG) robots, jumped 16% year over year, coming in at the higher end of its estimates. Revenue in the quarter jumped about 12% to $1.89 billion, beating expectations by $20 million. Intuitive’s efforts to come out of the COVID-induced slowdown are working. Its revenue has grown at a 17.8% CAGR after the pandemic, compared with the pre-pandemic revenue CAGR of 18.3%.
There are about 8,600 da Vinci systems (Intuitive Surgical’s robot) installed at healthcare facilities across the globe. Some estimates suggest the robotic surgery market is expected to grow at a CAGR of 11% through fiscal 2026. With a close to 70% market share, Intuitive Surigical is positioned well to benefit from this organic growth. Wall Street expects Intuitive Surgical Inc (NASDAQ:ISRG) earnings to grow 17% next year and at 12.6% over the following five years on a per-annum basis.
Baron Health Care Fund stated the following regarding Intuitive Surgical, Inc. (NASDAQ:ISRG) in its first quarter 2024 investor letter:
“Intuitive Surgical, Inc. (NASDAQ:ISRG) sells the da Vinci surgical robotic system for minimally invasive surgical procedures. The stock rose after the company announced the planned launch of the da Vinci 5, its next-generation, multiport robotic system. The new system has 10,000 times the computing power of its predecessor and features over 150 design upgrades such as force feedback, improved visualization, and productivity enhancements. Intuitive plans to launch the device at a small number of customers in the U.S. before releasing it more broadly. We think the da Vinci 5 will enable Intuitive to continue to generate strong revenue and earnings growth and maintain its competitive edge.”
2. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Investors: 124
Bank of America thinks AMD is one of the best best of breed stocks to buy for the third quarter of 2024.
Advanced Micro Devices Inc. (NASDAQ:AMD) is a pioneer when it comes to AI PCs. Advanced Micro Devices Inc. (NASDAQ:AMD) announced AMD Ryzen 7040 in January last year. It was the first chip to have built-in AI acceleration. Advanced Micro Devices Inc. (NASDAQ:AMD) later launched Ryzen 8040. Laptops powered by AMD’s Ryzen AI 300 series are expected to hit the market by July this year.
Advanced Micro Devices Inc. (NASDAQ:AMD) is also a strong player in the data center space. Advanced Micro Devices Inc. (NASDAQ:AMD) has teased 5th Generation Epyc Gen CPUs (codename Turin) and their Instinct MI-300 series GPU accelerators. Advanced Micro Devices Inc.’s (NASDAQ:AMD) serve chips are built on Zen5 core CPU architecture.
Average analyst estimate for Advanced Micro Devices Inc. (NASDAQ:AMD) is $187.2, which presents an upside potential of 17%. Wall Street analysts expect Advanced Micro Devices Inc. (NASDAQ:AMD) to grow 33% this year and 59% next year. For the next five years the growth will then moderate to 32% on a per-annum basis, which is still high. Based on Advanced Micro Devices Inc.’s (NASDAQ:AMD) 2025 EPS forecast, the stock is trading at around 28.6X forward P/E ratio, which isn’t high given Advanced Micro Devices Inc.’s (NASDAQ:AMD) growth trajectory and catalysts.
Meridian Contrarian Fund stated the following regarding Advanced Micro Devices, Inc. (NASDAQ:AMD) in its fourth quarter 2023 investor letter:
“Advanced Micro Devices, Inc. (NASDAQ:AMD) is a global semiconductor chip maker specializing in central processing units (CPUs), which are considered the core component of most computing devices, and graphics processing units (GPUs), which accelerate operations running on CPUs. We invested in 2018 when it was a mid-cap value stock plagued by many years of underperformance due to lagging technology and lost market hi share versus competitors Intel and Nvidia. Our research identified that changes and investments made by current management under CEO Lisa Su had, over several years, finally resulted in compelling technology that positioned AMD as a stronger competitor to Nvidia and that its latest products were superior to Intel’s. We invested on the the belief that AMD’s valuation at that that time did not reflect the potential for its technology leadership to generate significant market share gains and improved profits. This thesis has been playing out for several years. During the quarter, AMD unveiled more details about its upcoming GPU products for the AI market. The stock reacted positively to expectations that AMD’s GPU servers will be a viable alternative to Nvidia. Although we pared back our exposure to AMD into strength as part of our risk-management practice, we maintained a position in the stock. We believe AMD will continue to gain share in large and growing markets and is reasonably valued relative to the potential for significantly higher earnings.”
1. Nvidia Corp (NASDAQ:NVDA)
Number of Hedge Fund Investors: 186
Bank of American recently said Nvidia is one of the best of breed stocks for the third quarter of 2024. Nvidia recently fell amid valuation concerns, triggering concerns the stock’s rally might be over. However, Wall Street thinks Nvidia’s run is far from over.
Recently, Oppenheimer’s Rick Schafer joined the NVIDIA Corp (NASDAQ:NVDA) bull chorus, raising the chipmaker’s price target to $150 from $110 following the 10-1 stock split.
NVIDIA Corp (NASDAQ:NVDA) is one of the stocks accounting for a huge chunk of the total market returns, thanks to its AI-fueled rally that seems to have no end in sight. NVIDIA Corp (NASDAQ:NVDA) shares have gained about 206% over the past one year.
Recently, Barclays Tom O’Malley gave bullish comments on the stock, with a $145 price target and an Overweight rating. The analyst pointed to a potential $25 billion opportunity from countries building up their AI capabilities. O’Malley expects NVIDIA Corp’s (NASDAQ:NVDA) earnings at $3.62 per share in fiscal 2026, while Wall Street analysts on average have a $3.55 per share estimate for NVIDIA Corp (NASDAQ:NVDA) earnings for 2026.
RiverPark Large Growth Fund stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its first quarter 2024 investor letter:
“NVIDIA Corporation (NASDAQ:NVDA): NVDA shares were our top contributor in the quarter following blowout 4Q results and 1Q guidance driven by strong data center sales. The company reported quarterly revenue of $22.1 billion, up 265% year-over-year, and EPS in the quarter of $5.16, up 487% year-over-year and 12% ahead of expectations. Revenue guidance for 1Q of $24 billion was 8% above very high expectations. The artificial intelligence arms race kicked-off by ChatGPT and Alphabet’s Bard, among others, has generated tremendous demand for Nvidia’s next generation graphic processors.
NVDA is the leading designer of graphics processing units (GPU’s) required for powerful computer processing. Over the past 20 years, the company has evolved through innovation and adaptation from a predominantly gaming-focused chip vendor to one of the largest semiconductor/software vendors in the world. Over the past decade, the company has grown revenue at a compound annual rate of over 20% while expanding operating margins and, through its asset light business model, producing ever increasing amounts of free cash flow. Following recent results, Jensen Huang, founder and CEO of NVIDIA stated in the company’s press release, “a trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.”
However, NVIDIA Corporation (NASDAQ:NVDA) skeptics believe the stock has run too much as its valuation is high. For value-conscious investors the market is indeed teeming with other opportunities. If you are looking for an AI stock that is as promising as NVIDIA Corporation (NASDAQ:NVDA) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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