In this piece, we will take a look at the ten best stocks to buy right now according to Cliff Asness.
The investment approach of Cliff Asness, through his multi billion dollar hedge fund AQR Capital Management, is quite unique. While some investors such as Warren Buffett and Seth Klarman focus on value, and others like Ken Fisher focus on growth, Asness’ fund tries to quantitatively define what quality is.
While it sounds like a tall order, the hedge fund investor whose latest net worth is estimated to be $2 billion, has written quite a bit on the determinants of a quality stock. One such work came in the form of a research paper published in 2013. In it, Asness and his co authors shared three primary drivers of a quality stock. These are a stock’s profitability, growth, and safety. Within these three factors, profitability is driven by gross profits over assets, return on equity, return on assets, cash flow over assets, gross margin, and the portion of earnings that was cash. A quality stock’s growth is determined by the five year average growth in the per share values of the first five profitability factors, while a stock’s safety is based on its beta, leverage, bankruptcy risk, and return on equity volatility.
Using these metrics, Asness built two portfolios. The first portfolio selected stocks based on the quality metrics, while the latter, called Quality Minus Junk (QMJ) goes long on the quality stocks and shorts the junk stocks. QMJ is more characteristic of AQR Capital’s investment approach. The results showed that without adjusting for risk, the ten sub quality portfolios starting from a quality score of one and ending at ten all had positive excess returns over Treasury bills.
These returns ranged from 28 basis points of excess returns for the lowest quality portfolio to 70 basis points for the highest quality portfolio. The difference in the highest and lowest returns for these portfolios was the sharpest when they were tuned for the Carhart Four Factor Model that adds momentum to the traditional three factor Fama Factor model. The difference was 105 basis points per month for the four factor adjustment.
Looking at the returns for the QMJ portfolio, these jump to 60 basis points for the four factor model for US stocks and 61 basis points per month for the three and four factor models for global equities. When the US and global monthly excess returns are plotted over time for cumulative alpha, they sit at roughly 425% for the US between 1957 and 2016 and at 200% for global stocks between 1986 and 2012.
Shifting gears, as 2023 proved to be beneficial to the stock market because of returns driven by large cap stocks and artificial intelligence, AQR Capital also posted strong results. As per Reuters, the fund’s Absolute Return Strategy delivered 18.5% in returns in 2023, while the AQR Equity Market Neutral Global Value strategy returned a stronger 20.6% in net returns. Before fees, the Absolute Return’s returns were 55%, with the net, or post fee returns sitting at 43.5% in 2022 according to Bloomberg,
AQR’s double digit performance continued during the first quarter. More data sourced by Bloomberg shows that AQR’s Managed Futures Full Volatility Strategy, Delphi Long Short Equity Strategy, and Apex Strategy gained 17.4%, 13%, and 11%, during Q1 2024. Insider Monkey’s data shows that the cumulative value of the hedge fund’s stock holdings filed with the SEC was $58.7 billion by the end of that time period marking a $13.1 billion or 28.7% annual jump. Double digit returns in a quarter are no small matter, and some of the best known hedge funds such as Citadel Wellington, Point72, and Millennium 5.8%, 5.3%, and 3.7% in respective returns during the same time period.
Before we get to our list of Cliff Asness’ top stock picks, it’s also important to see how his firms’ funds have performed so far during the year. September has marked the start of a paradigm shift on Wall Street in the form of the Federal Reserve starting its interest rate cuts in the form of a 50 basis point cut. However, the Fed’s data seems to have disappointed investors as it indicates that as of mid September, it expects the rate to sit at 3.25% – 3.50% by 2025 end.
When looking at the returns of AQR’s different funds year to date, it appears that momentum is one of the top plays as of now. This is because the AQR Large Cap Momentum Style Fund has delivered 21.70% in year to date returns which is roughly three percentage points higher than the benchmark index’s 18.64% in returns. On the flip side, the AQR Large Cap Defensive Style Fund has delivered 16.11% in year to date returns which are 2.53 percentage points lower than the benchmark’s returns. Judging by this, the momentum fund which touts to invest in stocks “considered to have positive momentum if it has performed well in the prior 12 months relative to other stocks in the investment universe” has been the way to go so far in 2024.
With these details in mind, let’s take a look at the ten best stocks to buy according to Cliff Asness.
Cliff Asness of AQR Capital Management
Our Methodology
To make our list of the ten best stocks to buy according to Cliff Asness, we ranked all the stocks part of his fund AQR Capital’s Q2 2024 13F SEC filings and picked out the most valuable stakes.
For these stocks, we also mentioned the number of hedge fund investors based on Insider Monkey’s research. 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. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Holders In Q2 2024: 130
AQR Funds’ Latest Investment Stake: $483 million
Broadcom Inc. (NASDAQ:AVGO) is one of the most diversified technology companies in the world. The firm operates in two highly lucrative technology industries, namely semiconductor design, and software as a service (SaaS). This provides Broadcom Inc. (NASDAQ:AVGO) with considerable advantages in today’s industry as its chips are used across consumer electronics products such as the iPhone. Additionally, the cybersecurity SaaS business provides Broadcom Inc. (NASDAQ:AVGO) with a high margin, recurring revenue business with growth trends already visible in the firm’s latest Q3 after software revenue jumped by 300% on the back of its VMware acquisition. However, potential tailwinds such as Apple deciding to increase the presence of in house chips in its smartphones and a slowdown in AI could spell trouble. This was the case in September when Broadcom Inc. (NASDAQ:AVGO)’s dropped by 10% after its $1 billion AI sales guidance boost did not satiate growth hungry investors.
Here’s what Broadcom Inc. (NASDAQ:AVGO) had to say about this guidance during the Q3 2024 earnings call:
“Well, our number in third quarter is pretty much in line what we expect AI revenue to be. And our revenue in Q4 was — forecast for Q4 is what’s giving us the basis to a large extent to step up our guidance for AI revenue for the full year to over $12 billion. So if nothing else, that continues to indicate, I hope to us, that next year the trend will continue to be strong. And again, it’s all largely hyperscalers, cloud, and digital natives. And it’s again, a mix of AI accelerators and networking. And it’s also largely based on backlog we have in place for that. Beyond that — and it shows the growth. Beyond that, no, we’re not guiding you beyond the backlog we have. So I kind of answer your question indirectly on, do I have any more customers? We shall see.”
9. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders In Q2 2024: 80
AQR Funds’ Latest Investment Stake: $489 million
Johnson & Johnson (NYSE:JNJ) is one of the biggest pharmaceutical and general healthcare products providers in the world. This enables it to have fortress income statements and balance sheets, as evidenced by $86.5 billion in trailing twelve month net income and $21.8 billion in cash and equivalents. Johnson & Johnson (NYSE:JNJ)’s scale also means that in case its products face troubles, the costs can be astounding. One of the key factors surrounding its narrative these days is lawsuits that the firm has faced because of its talcum powder for babies. Prior to September, Johnson & Johnson (NYSE:JNJ) had agreed to pay a stunning $700 million in settlements and make progress with plans to make a subsidiary declare bankruptcy to deal with an unbelievable $6.4 billion in lawsuits. September saw some respite for the firm, as an Oregon court overturned a $260 million verdict against the firm. Yet, investors were unimpressed as the stock remained flat during the day. Its resources mean that Johnson & Johnson (NYSE:JNJ) can deal with multi million dollar legal problems and focus on high growth markets, one of which is medical devices.
Here’s what Johnson & Johnson (NYSE:JNJ) management had to say on this front during the Q2 2024 earnings call:
“Turning to MedTech, we continue to advance our pipeline, launch new commercial products and integrate strategic acquisitions that broaden and further differentiate our portfolio. In cardiovascular, we are enhancing our portfolio and shifting into higher growth markets through strategic acquisitions such as Shockwave Medical. In May, we announced the launch of our CARTO 3 Version 8 electroanatomical mapping system. This is the latest version of our 3D heart mapping system, which has machine learning capabilities that increase efficiency, reproducibility, and accuracy in maps electrophysiologists use to treat atrial fibrillation and other arrhythmias. In pulsed field ablation, we initiated the commercial launch of the VARIPULSE platform in the EU and Japan receiving early positive physician feedback in the external evaluation period.
We also delivered results from the pivotal phase of the admIRE trial, where the VARIPULSE platform demonstrated 85% peak primary effectiveness with minimal adverse events, short PFA application times and low fluoroscopy exposure. In orthopedics, we received 510(k) FDA clearance for the clinical application of the VELYS Robotic-Assisted Solution in unicompartmental knee arthroplasty. This is designed for both medial and lateral procedures enabling surgeons to guide precise implant placement without a CT scan. In surgery, we launched the ECHELON 3000 in the U.S., which combines 3D stapling and gripping surface technology to enable greater staple line security. This has been shown to deliver 47% fewer leaks, reduce surgical risks and improve surgical outcomes.”
