Maintaining balance is essential in the current financial climate as uncertainties loom over both equity and bond markets. Investors are advised to stay informed and seek potential opportunities amid these changes. Recently, discussions have centered around the performance of mega-cap stocks, particularly in a bull market that has seen significant gains. As this bull market approaches its second anniversary, there is optimism regarding the future of AI and its impact on stock performance. Key players in the market are expected to continue driving growth, although at a potentially slower pace than in previous years.
Looking ahead, investors should prepare for a more gradual approach to interest rate cuts and reassess historical expectations regarding market dynamics. The ongoing economic shifts necessitate a diversified investment strategy focused on long-term growth potential, particularly for those new to investing. Emphasizing stocks with solid fundamentals and cash reserves may provide safer opportunities in an evolving landscape. Earlier in October, Malcolm Ethridge, Capital Area Planning Group managing partner, appeared on CNBC to discuss markets, particularly mega-cap stocks. We discussed his opinion in greater detail in our article on the 8 Best Stocks To Buy For Beginners Right Now, here’s an excerpt from it:
“When discussing the resilience of the two-year-old bull market, Ethridge highlighted that rising interest rates were initially expected to negatively impact market performance. However, despite facing historically high rates, the market has thrived. He noted that many leading companies, including some of the MAG7, have substantial cash reserves and are not reliant on borrowing to fund growth. This financial strength allows them to invest in AI technologies without being overly concerned about the Federal Reserve’s policies…
The conversation then shifted to expectations regarding future Fed rate cuts. Ethridge suggested that investors should prepare for a slower pace of rate cuts than previously anticipated. While a 25 basis point cut may occur at the next meeting, he indicated that there could be a prolonged period of stability afterward rather than a rapid series of cuts…”
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Strategies for Hedging and Investment
On October 30, RBC’s Amy Wu Silverman appeared on CNBC and outlined a strategy for investors to hedge risks in the equity markets, through the use of put options. Amy Wu Silverman thinks that investors have gotten long where they need to, and now they’re hedging positions. She provided insights into the current state of the options market, particularly focusing on mega-cap tech stocks, commonly called the MAG7. Silverman noted a stark contrast between H1 2024 and the current market sentiment in the latter half as the market gears up for significant earnings reports this week. In the earlier months, there was a notable exuberance among investors driven by fear of missing out on AI opportunities. This led to a surge in upside call buying. However, as of now, that trend has diminished, indicating that investors have largely established their positions and are now more focused on hedging their investments rather than aggressively pursuing new upside.
Silverman emphasized that while there is a general sense of bullishness surrounding these mega-cap tech names, many investors are seeking protection for their long positions. This protective stance is particularly relevant in a year where AI advancements have significantly influenced market performance. The conversation also highlighted the term “overhang,” which Silverman identified as her word of the day. This concept reflects the uncertainty surrounding upcoming major events, including earnings reports from megacap tech companies, the US presidential election scheduled for November 5, and Federal Open Market Committee (FOMC) meetings. She suggested that this overhang creates a challenging environment for investors as they navigate daily market fluctuations while anticipating future developments.
Silverman pointed out that investors are closely monitoring volatility expectations. A key metric in this regard is the Volatility Risk Premium, which measures how future expectations for volatility compare to actual market movements. Currently, this premium is substantial, indicating that traders expect heightened volatility in response to upcoming data releases and events. There is growing concern among investors about the possibility of not receiving an anticipated Fed rate cut if economic data comes in stronger than expected.
In addition to tech stocks, she discussed the oil market’s volatility amid geopolitical tensions in the Middle East. Silverman noted that there has been an increase in upside hedging related to these geopolitical risks. Investors are trying to determine whether the high volatility risk premium stems from political uncertainties or ongoing geopolitical factors impacting energy markets. To mitigate these risks, she recommended looking at energy proxies such as XOP or XEG in Canada as potential hedges against escalating geopolitical tensions.
Before concluding her remarks, Silverman shared a specific options trading strategy ahead of the election: S&P put spreads for November expiration. This strategy involves purchasing near-the-money put options while selling further out-of-the-money puts. Given the recent rally in the S&P 500 and the multitude of significant events on the horizon, she described this approach as an effective insurance mechanism against potential market downturns while capitalizing on current volatility conditions.
Methodology
We sifted through several threads to compile a list of the top 30 trending stocks. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
10. Tesla Inc. (NASDAQ:TSLA)
Number of Hedge Fund Holders: 85
Tesla Inc. (NASDAQ:TSLA) is an innovative EV and clean energy company that designs, manufactures, and sells battery electric vehicles (BEVs). In addition to automotive offerings, it’s involved in solar energy solutions and energy storage systems. With a strong focus on sustainable energy and advanced technology, it has established itself as a significant player in both the automotive and tech industries.
It recently unveiled a new lineup of EVs, designed to stimulate the launch of new models. With its expanded production capacity, the company is poised to deliver over 3 million vehicles annually when fully optimized. Furthermore, it achieved a significant milestone by producing its 7 millionth vehicle on October 22 recently.
Tesla Inc. (NASDAQ:TSLA) reported strong third-quarter results, with revenue reaching $25.18 billion, a 7.85% year-over-year increase. While automotive revenue grew modestly by 2% to $20.02 billion, the energy segment saw a significant 52% surge and reached $2.34 billion. This overall revenue growth was driven by increased vehicle deliveries and the rapid expansion of the company’s energy business.
It’s investing $3.6 billion to build a new battery factory in Nevada, focused on producing larger 4680 battery cells crucial for the Cybertruck. It’s also investing $1 billion in a Texas-based lithium refinery to produce battery-grade lithium hydroxide sustainably.
Tesla Inc.’s (NASDAQ:TSLA) focus on AI and autonomous driving, coupled with its global manufacturing footprint and extensive charging infrastructure, positions the company for continued growth. The potential success of its Full Self-Driving (FSD) technology and Robotaxi service could be significant catalysts for future growth, transforming it into a leading mobility services provider.
Baron Opportunity Fund stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its Q3 2024 investor letter:
Tesla, Inc. (NASDAQ:TSLA) designs, manufactures, and sells EVs, related software and components, and solar and energy storage products. Tesla shares contributed to performance during the quarter, reflecting increased investor confidence and optimism in Tesla’s AI initiatives, stabilization in the company’s industrial operations, including strong growth in its energy segment, and the anticipated launch of new vehicle models in the first half of 2025. After years of industry-wide investments in autonomous vehicles, advancements in AI technology have accelerated the development of autonomous driving technology. Tesla deployed its AI-based Full Self Driving (FSD) solution last year and has demonstrated rapid improvements in driving performance. It has articulated a goal of achieving nearly a 20-fold improvement in miles driven between critical disengagements – soon exceeding 10,000 miles – over a two-month period this fall.
AI relies on vast amounts of high-quality data and computational power, and we believe Tesla possesses distinct assets that will serve as a strong foundation for its AI initiatives. Since 2016, every Tesla vehicle produced has been outfitted with cameras and essential hardware, resulting in millions of connected cars globally that gather data from billions of miles driven each year by the Tesla fleet. This rich and unique dataset is invaluable for FSD training. Tesla is also differentiating with its AI training compute factory. Tesla finished 2023 with close to 15,000 NVIDIA H100 chip equivalents in training computation power. By the second quarter of 2024, it doubled this capacity. In the third quarter, the company activated its advanced training data center in Texas, which should allow the company to harness up to 90,000 H100 equivalent compute power by the end of 2024 – six times the compute capacity it had at the beginning of the year and by far the world’s largest autonomous driving training cluster. Unlike any other automotive company, Tesla is investing billions of profits generated by its automotive segment in its AI initiatives aiming to capture material share in lucrative markets of autonomy and robotics…” (Click here to read the full text)
9. PayPal Holdings Inc. (NASDAQ:PYPL)
Number of Hedge Fund Holders: 87
PayPal Holdings Inc. (NASDAQ:PYPL) is a popular online payment service that makes it easy to send and receive money. Its platform can be used to shop online, transfer funds to friends and family, and even pay bills.
The company is focused on improving branded checkout, with new mobile checkout experiences designed to boost conversion. These new experiences are being rolled out to customers and are already delivering significant results. Fastlane, its new guest checkout solution, has gained traction with 1,000+ merchants. It is also making progress in large enterprises, with Braintree, which is a payment processing platform, contributing to increased profits for the company.
The company is also expanding its reach to small and medium-sized businesses through PayPal Complete Payments and partnerships with Shopify and Amazon. It’s seeing early signs of success with the PayPal debit card and plans to expand PayPal Everywhere to Europe. Its Venmo segment, for peer-to-peer transactions, is also transforming, with a focus on shifting from a P2P service to a broader financial platform.
The company’s Q3 results were strong, with total payment volume growing 9% to $423 billion and revenue increasing 5.78% to $7.85 billion. The earnings per share rose 22% year-over-year. The number of active accounts grew by 3 million to 432 million, and monthly active accounts rose by 2% to 223 million. PayPal Holdings Inc. (NASDAQ:PYPL) is focused on a price-to-value strategy, prioritizing healthy, profitable growth. With continued investment in key growth initiatives, it is well-positioned for future success.
Longleaf Partners Fund stated the following regarding PayPal Holdings, Inc. (NASDAQ:PYPL) in its Q3 2024 investor letter:
“PayPal Holdings, Inc. (NASDAQ:PYPL) – Digital payments platform PayPal was a contributor for the quarter. The company posted solid results, with gross margin dollars growing by 8%, an improvement over the 4% increase in the previous quarter. Strong cost management also led to double-digit FCF growth, a key metric for us. The company further enhanced shareholder value by repurchasing nearly 10% of its shares on an annualized basis, leading to even stronger FCF per share growth. Much of what we envisioned at our initial investment is materializing quicker than expected, driven by the improved leadership of relatively new CEO Alex Chriss.”
