In this piece, we will take a look at the 13 best quality stocks to buy now.
Investing in 2024 is significantly different from investing in the 1950s and onward. This is because these days investors have to. sift through thousands of stocks and countless data points and signals to separate the wheat from the chaff and make the right investment decisions. Amidst this hubris, the ability to pick out ‘quality’ stocks becomes important, and there’s quite a lot of financial literature available that helps determine what such stocks are.
Typically, stock analysis involves analyzing a firm’s financial statements to determine profitability, operating strengths, cost control, asset utilization, and other metrics. Some of these are also present in financial literature that discusses quality stocks. One such research paper comes courtesy of researchers associated with Research Affiliates. They point out that metrics that typically define a quality stock include earnings stability, capital structure, profitability, accounting practices, and investing strategies. Within these, the quality factors that were also related to returns were investment strategies, dividend payouts, profitability, and accounting strategies.
The next thing to ask is, whether quality stocks are any different from standard run of the mill stocks when it comes to share price performance. For context, the last 12 months on the stock market have been dominated by a few key themes. These are artificial intelligence, inflation, interest rates, and GDP growth. Higher rates and inflation are bearish stock indicators, while growth and AI have proven to have kept the market buoyant at a time when rates are at two decade high levels. So, over the past year, exchange traded funds that track quality stocks have appreciated by 12% to 27%, the midpoint of which is slightly lower than the S&P 500’s 23% price appreciation over the same time period. However, picking the right quality stocks appears to have its advantages as well, since the high end of the performance, i.e. 27%, is far higher than what the index has delivered.
ETFs and research aren’t the only ones that talk about quality stocks. One hedge fund that’s become quite well known for its focus on quality stocks is Cliff Asness’ AQR Capital Management. One of the largest hedge funds in the world, AQR had a 13F investment portfolio worth $58 billion as of Q1 2024 end according to Insider Monkey’s research. Close to a quarter of its portfolio is invested in the technology industry, and the second biggest category is services stocks. AQR focuses on stocks that follow its strategy of Quality Minus Junk or QMJ. According to its founder Cliff Asness, a quality stock is defined by its shareholder payouts, growth, profitability, and sound financial and general management. We recently took a look at some top AQR Capital management stocks and you can check them out by looking at 13 Best Stocks To Buy Now According To Billionaire Cliff Asness.
Before we head to our list of the best quality stocks, a general overview of the stock market is relevant. Right now, investors are wondering when the first interest rate cuts might occur. The latest bit on this front came in the form of the Personal Consumption Expenditure (PCE) data from the Commerce Department. This data set revealed that the 12 month inflation in the US stood at 2.7% in April 2024, which was still higher than the Fed’s preferred rate of 2%. Additionally, the data also provided investors with some bearish signals. These were apparent in the readings for consumer spending, which slowed down to 2% in the first quarter of 2024 over the robust 3.3% reading in Q4 2023.
Lower spending means less money sloshing in the economy, and while this might help reduce prices, it can also affect business performance, economic growth, and naturally, stock market performance. Data from the CME Fed Watch Tool shows that 47% of all investors polled expect a 25 basis point rate cut in September, while an additional 7.5% believe that the Fed might get generous and cut rates by as much as 50 basis points.
With these details in mind, let’s take a look at some top quality stocks that hedge funds are buying.
A money manager at a desk crowded with financial reports and data screens.
Our Methodology
To make our list of the best quality stocks to buy, we ranked the 30 largest constituents of a quality stock ETF and picked out those with the highest number of hedge fund investors in Q1 2024.
By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. 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).
13. Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Shareholders In Q1 2024: 79
Applied Materials, Inc. (NASDAQ:AMAT) is a semiconductor manufacturing equipment firm headquartered in Santa Clara, California. The firm’s shares are up by a strong 59% over the past twelve months since it is a key player in the chip industry that is seeing AI related tailwinds. On the earnings front, adjusted EPS has beaten analyst estimates in all four latest quarters, and Applied Materials, Inc. (NASDAQ:AMAT) is a dividend paying stock with a 40 cent quarterly dividend and a 0.74% yield.
As of Q1 2024, 79 hedge funds part of Insider Monkey’s database were Applied Materials, Inc. (NASDAQ:AMAT)’s stakeholders. David Blood and Al Gore’s Generation Investment Management held the largest stake which was worth $1 billion.
Applied Materials, Inc. (NASDAQ:AMAT)’s valuation is more down to earth though since its forward P/E ratio is 25.77 which is slightly higher than the S&P 500’s 21. Its revenue has grown by 54% over the past four years, and the stock has appreciated by 251% during the same time period as investors target its potential to utilize AI demand. Recently AMAT made our list of the 10 Best Performing Dividend Stocks in 2024. Here is what we said about the stock:
“In its fiscal Q2 2024, Applied Materials, Inc. (NASDAQ:AMAT) reported revenue of $6.6 billion, which remained unchanged from the same period last year. However, the revenue beat analysts’ estimates by $110 million. Its net income for the period jumped by 9% year-over-year to $1.7 billion.
Examining the company’s cash position in relation to its dividend strategy revealed that it holds a sufficient amount of cash on its balance sheet. In the most recent quarter, Applied Materials, Inc. (NASDAQ:AMAT) generated nearly $1.4 billion in operating cash flow and its free cash flow came in at over $1.1 billion. During the quarter, the company returned $1.09 billion to shareholders, including $266 million in dividends. In addition to this, Applied Materials, Inc. (NASDAQ:AMAT) ended the quarter with over $7 billion available in cash and cash equivalents.”
We aren’t too bullish on AMAT right now because of the legal risks it is facing. The US Department of Commerce is continuing its investigation into Applied Materials Inc.’s shipments to Chinese customers to enforce strict trade restrictions aimed at preventing China from acquiring advanced chipmaking capabilities, which the US views as a national security threat. Applied Materials disclosed that it received subpoenas in May from the Commerce Department’s Bureau of Industry and Security, following earlier subpoenas in November. The company is cooperating fully but acknowledges uncertainties about the investigation’s outcome or potential penalties. Additionally, Applied Materials has faced inquiries from the US Attorney’s Office for the District of Massachusetts since 2022 and the SEC earlier this year. As the largest US maker of chip-manufacturing equipment, Applied Materials was significantly impacted by the initial export restrictions but continues to rely on China, which accounts for about a quarter of its revenue, with Chinese businesses increasingly investing in older chipmaking equipment.
12. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Shareholders In Q1 2024: 80
Johnson & Johnson (NYSE:JNJ), the consumer goods and personal health firm, ended May 2024 on a strong note as it completed the acquisition of a medical devices manufacturer. This expands the firm’s market and enables it to grow revenue by targeting new markets. The average of 23 one year analyst share price targets for the firm is $172.16, and the average share rating is Buy.
During 2024’s first quarter, 80 hedge funds out of the 919 profiled by Insider Monkey had bought stakes in Johnson & Johnson (NYSE:JNJ). One fund with a valuable stake was Ken Fisher’s Fisher Asset Management. It held 6.6 million shares that were worth $1 billion.
Johnson & Johnson (NYSE:JNJ)’s shares have returned 160% over the past decade, lower than the S&P 500’s 212%. This casts doubts on whether it can outperform the broader market, and a forward P/E ratio of 13.79 makes it undervalued compared to the broader market. However, the firm does have more than forty new products in late stage clinical trials that could inject life into the shares.
Johnson & Johnson decided to spin off its consumer health business to create two more focused and agile entities. Kenvue Inc (KVUE) is designed to concentrate on consumer health products, including well-known brands like Tylenol, Band-Aid, Listerine, and Neutrogena, while Johnson & Johnson focuses on its pharmaceutical and medical device businesses. Here is what Oakmark Funds said about Kenvue recently:
“Kenvue Inc. (NYSE:KVUE) became the largest standalone consumer health company following its split-off from Johnson & Johnson in May 2023. The company’s highly recognizable brands, such as Neutrogena, Listerine, Tylenol and Band-Aid, have been market share leaders in their respective categories for generations. However, Kenvue’s first year as a public company was clouded by litigation and market share losses in certain categories. As a result, Kenvue now trades for just 16.5x trailing earnings, a substantial discount to the market and other consumer health and packaged goods companies. We see an opportunity for the company to improve efficiency and re-invest the cost savings into increased product development and marketing, which should help improve its growth and brand equity.”
One factor that recently depressed the stock price of JNJ is legal risks. Johnson & Johnson is advancing a $6.475 billion proposed settlement to resolve tens of thousands of lawsuits alleging that its talc products, including baby powder, contain asbestos and cause ovarian cancer. The settlement will be handled through a third bankruptcy filing of a subsidiary, LTL Management, aiming to end all current and future ovarian cancer claims, which represent 99% of the talc-related lawsuits. Previous efforts to settle these claims via bankruptcy were rejected by courts. J&J asserts that its products are safe and has garnered support from the majority of plaintiffs’ attorneys. The settlement requires 75% support to be finalized and would prevent further litigation. This deal builds on prior settlements related to mesothelioma and state consumer protection actions, with J&J having already incurred significant costs for talc-related settlements. We don’t think JNJ shares will start delivering satisfactory returns until this legal cloud over the company goes away.
11. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Shareholders In Q1 2024: 104
Health benefits provider UnitedHealth Group Incorporated (NYSE:UNH)’s average share price target of 23 one year analyst estimates is $569.78 and the average rating is Strong Buy. On May 15, Bank of America Securities analyst Kevin Fischbeck reaffirmed his Buy rating on UnitedHealth Group Incorporated (NYSE:UNH) with a price target of $675.00. He highlighted several factors for this rating, including the company’s initiatives to achieve long-term EPS growth of 13-16%, its robust value-based care model, and its adaptable business strategy. Fischbeck emphasized the company’s effective cost management and ability to maintain target margins. He anticipates continued growth for UnitedHealth Group with stable margins, driven by disciplined pricing and sustainable benefit design.
The firm’s shares dropped by 6% and led the insurance sector in late May 2024 when it shared that state insurance reimbursements could drop due to a pandemic era policy ending.
As of Q1 2024, 104 hedge funds covered by Insider Monkey’s research had held a stake in UnitedHealth Group Incorporated (NYSE:UNH). Ken Fisher’s Fisher Asset Management was the largest stakeholder due to its $1.4 billion stake.
Like other established firms, UnitedHealth Group Incorporated (NYSE:UNH)’s forward P/E of 17 makes it undervalued compared to the market. Additionally, while its revenue has grown by 44% over the past four years, the shares are up by 71%, leaving them vulnerable to downward shifts. Baron Health Care Fund is long-term bullish on UNH shares, thinking that the company’s stock price can deliver around 15% annual returns:
“UnitedHealth Group Incorporated (NYSE:UNH) is a leading health insurance company that operates across four segments: United Healthcare, Optum Health, OptumInsight, and OptumRX. Shares fell alongside other managed care organizations (MCOs) due to patient utilization of Medicare Advantage (MA) that was higher than consensus forecasts, raising concerns that MCOs had mispriced 2024 bids and could suffer margin compression as a result. In addition, the industry is facing headwinds from MA reimbursement cuts and Star Rating changes. While management said higher cost trends are mostly transitory and reflected in its bidding, and 2024 guidance was roughly in line with consensus, investors took a more cautious wait-and-see approach. We believe UnitedHealth should remain a core portfolio holding, as it is a way to play positive demographic, population health, and value-based reimbursement trends. Despite its size, we think the company should be able to grow earnings consistent with its 13% to 16% long-term EPS annual target, the fastest among major MCOs.”
10. Netflix, Inc. (NASDAQ:NFLX)
Number of Hedge Fund Shareholders In Q1 2024: 107
Netflix, Inc. (NASDAQ:NFLX), the global streaming giant, has beaten analyst adjusted EPS estimates in three out of its four latest quarters. These include Netflix, Inc. (NASDAQ:NFLX)’s latest quarter, which saw the firm report $9.37 billion in revenue and $5.28 in adjusted EPS. These beat analyst estimates of $9.28 billion for revenue and $4.52 for EPS.
For their first quarter of 2024 investment stakes, 107 hedge funds part of Insider Monkey’s database had bought stakes in Netflix, Inc. (NASDAQ:NFLX). Ken Fisher’s Fisher Asset Management held the largest stake which was worth $2.5 billion.
Fund Ensemble Capital Management commented on Netflix, Inc. (NASDAQ:NFLX)’s quarterly performance in its Q1 2024 investor letter as it aimed at the bears and shared:
The rapid recovery of Netflix’s subscriber growth has shocked investors who drove the stock down to a price of just $166 in May 2022. While at the time, bearish investors were declaring the company’s growth days were behind it, instead the company added a remarkable 13.1 million new subscribers in the most recent quarter. This was the single largest quarterly subscriber addition other than the large gains experienced during the first quarter of COVID. For all of 2023, the company added nearly 30 million new subscribers, making it the largest annual gain in Netflix history other than the first year of COVID.
The tail end of May also saw some action for Netflix, Inc. (NASDAQ:NFLX)’s shares on the analyst front. It received a $50 share price target boost from Evercore, which set a $700 share price target. In the coverage, the firm kept an Overweight rating for the shares, citing a high potential for earnings per share in 2025. Evercore analyst Mark Mahaney shared that he was confident in Netflix, Inc. (NASDAQ:NFLX)’s financial statement fundamentals and the potential for the video live streaming company to successfully phase out its Basic Plan. Netflix, Inc. (NASDAQ:NFLX) had started out 2024 by announcing the decision in its Q4 2023 shareholder letter, after revealing earlier during the year that new subscribers to the platform would be unable to sign up to the lowest subscription tier. The analyst believes that Netflix, Inc. (NASDAQ:NFLX) also stands to benefit from expanding revenue streams to include additional markets such as livestreaming video games.
9. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Shareholders In Q1 2024: 108
Adobe Inc. (NASDAQ:ADBE), the well known global productivity software firm, is down by 23% year to date, which stands in contrast to the S&P 500’s 11% gain. Among the reasons behind the drop is the latest quarterly result that saw Adobe Inc. (NASDAQ:ADBE) beat analyst EPS and revenue estimates. Wall Street was focused on the current quarter, and the shares tumbled by 11% as the high end of Adobe Inc. (NASDAQ:ADBE)’s $5.30 billion in guidance missed analyst estimates of $5.31 billion.
By the end of this year’s first quarter, 108 hedge funds covered by Insider Monkey’s study were Adobe Inc. (NASDAQ:ADBE)’s stakeholders. Among these, Ken Fisher’s Fisher Asset Management owned the most valuable stake which was worth $2.2 billion.
While the shares are down, Adobe Inc. (NASDAQ:ADBE) could turn the tide in the AI industry. Its tools have generated more than six billion AI assets since Q1 2023, and the firm seems to be focusing on creating new AI tools as R&D expenses grew by $112 million annually in the latest quarter. A forward P/E of 24.75 still makes the stock slightly overvalued over the S&P 500. While the revenue guidance led to a share price fall earlier this year, Adobe Inc. (NASDAQ:ADBE) is still a leading player in the enterprise software market. During its earnings call for the first quarter of 2024, Adobe Inc. (NASDAQ:ADBE) president David Wadhwani elaborated that Adobe Express, his firm’s cloud based content creation tool, had integrated Adobe’s Firefly Services AI platform, leading to ‘delighted’ customers generating content like “images, vectors, designs and text effects.”
Here is how RiverPark explained the recent weakness in Adobe shares:
“Adobe Inc. (NASDAQ:ADBE): ADBE was our last top detractor in the quarter following OpenAI’s announcement of an AI-based text-to-video offering called Sora. Some investors seem to believe that AI and the Sora product specifically pose an existential threat to Adobe’s Creative Cloud Suite. We do not share these concerns and believe that AI is a tremendous growth opportunity for Adobe. In fact, in a recent conference call, management described how innovative AI-based solutions are expected to be drivers of growth across its product lines.
ADBE is the leading software and solutions provider in the content creation and content management space. The company offers a line of products and services used by creative professionals, communicators, businesses of all sizes, and consumers for creating, managing, delivering, measuring and optimizing content and experiences across personal computers, smartphones, other electronic devices and digital media formats. The company has grown revenue in the double-digit percent range for the last decade, and as it enters its 42nd year since its founding, we expect ADBE to continue to grow revenue greater than 10% per year through 2028. The company generates 40% EBITDA margins, which we think can expand to nearly 50%, and we believe the company will more than double last year’s roughly $7 billion of free cash flow over the next five years.”
8. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Shareholders In Q1 2024: 109
Pharma giant Eli Lilly and Company (NYSE:LLY) is making the waves with its weight loss drugs. Its shares are up by 38% year to date, and the future might be very bright for Eli Lilly and Company (NYSE:LLY) if we believe a recent report from Goldman Sachs. This expects the weight loss drug market to sit at a whopping $130 billion by 2023 end, allowing Eli Lilly and Company (NYSE:LLY) to potentially double its current revenue even if it captured just 20% of the market.
During Q1 2024, 109 hedge funds part of Insider Monkey’s database had bought a stake in Eli Lilly and Company (NYSE:LLY). Ken Fisher’s Fisher Asset Management held the largest stake which was worth $3.6 billion.
Baron Health Care Fund cited confidence in Eli Lilly and Company (NYSE:LLY) financials and business model in its Q1 2024 investor letter. The fund’s managers believe that the company is well positioned to grow over the next couple of years. They outlined:
Eli Lilly and Company is a global pharmaceutical company that discovers, develops, manufactures, and sells medicines in the categories of diabetes, oncology, neuroscience, and immunology, among other areas. Stock performance was strong due to robust fourth quarter sales of Mounjaro/ Zepbound, better-than-anticipated initial guidance for fiscal year 2024, and ongoing enthusiasm surrounding the company’s obesity and diabetes franchises. We continue to think Lilly is well positioned to grow revenue and earnings at attractive rates through the end of the decade and beyond.
The fund added that it was “positive about the company’s long-term outlook” despite reducing its position during the quarter because of valuation changes.
Eli Lilly and Company (NYSE:LLY)’s forward P/E ratio of 59.88 shows heightened expectations towards LLY’s earnings growth rate. Additionally, while its revenue has grown by 38% over the past four years, the stock is up by 522% as investors have piled into the hype for weight loss drugs. Considering future weight loss drug market estimates and Eli Lilly and Company (NYSE:LLY)’s revenue, it appears that LLY’s share price already reflects a lot of the expected future growth in revenues.
7. Mastercard Incorporated (NYSE:MA)
Number of Hedge Fund Shareholders In Q1 2024: 148
Payments platform provider Mastercard Incorporated (NYSE:MA) has beaten adjusted analyst EPS estimates in all four of its latest quarters. The average of 38 one year share price targets is $512, and the shares are rated Strong Buy on average. May 2024 was also a rather historic month for Mastercard Incorporated (NYSE:MA)’s shares as it saw Piper Sandler initiative coverage. The research firm set an Overweight weighting on the shares and ascribed them a price target of $531. At the heart of the coverage was analyst Arvind Ramnani’s belief that Mastercard Incorporated (NYSE:MA) is slated to grow its revenue by 11% in 2024 and ~13% next year. Tailwinds to this growth include strong performace by the firm’s value added services and payments business divisions.
As of March 2024 end, 148 out of the 933 hedge funds profiled by Insider Monkey were Mastercard Incorporated (NYSE:MA)’s stakeholders. Charles Akre’s Akre Capital Management owned the most valuable stake which was worth $2.2 billion.
A key player in the fintech market, Mastercard Incorporated (NYSE:MA) was mentioned by Baron Funds in its Q1 2024 investor letter which shared:
Payments was another standout theme thanks to double-digit gains from global payment companies Mastercard Incorporated and Fiserv, Inc. Mastercard’s shares rose after the company reported quarterly financial results that exceeded Street expectations, with 13% revenue growth and 20% EPS growth. Spending volume remains healthy, with outsized growth in international markets and cross-border transactions. Management also provided encouraging financial guidance for 2024 that calls for double-digit revenue growth and margin expansion. Meanwhile, investors largely shrugged off potential risks to Mastercard stemming from Capital One’s announced acquisition of Discover.
Mastercard currently trades at a forward PE ratio of 31 which is in line with its and Visa’s historical PE multiples. Mastercard shares returned 69% over the last 5 years. We believe Mastercard is likely to deliver similar returns over the following 5 years. While we acknowledge the potential of Mastercard and Visa, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
6. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Shareholders In Q1 2024: 150
Tech giant Apple Inc. (NASDAQ:AAPL) is a household name. These days, the rumor mill is adamant when it comes to Apple and AI as sources insist that Apple Inc. (NASDAQ:AAPL) is interested in partnering up with OpenAI to bring AI functionality to its Siri virtual assistant and validate the consumer use cases for the highly hyped technology. Amidst broader concern on Wall Street about the iPhone and Apple’s China woes, Wedbush’s Dan Ives was filled with optimism in a May 2024 interview. During the talk, he shared that 70% of China’s 225 million iPhones were yet to be upgraded, and the introduction of AI to the Pro model could very well see Apple Inc. (NASDAQ:AAPL) grow the iconic Average Selling Price (ASP) in the region.
As Q1 2024 ended, 150 hedge funds part of Insider Monkey’s database had held a stake in Apple Inc. (NASDAQ:AAPL). Warren Buffett’s Berkshire Hathaway held the largest stake which was worth $135 billion.
Due to its heft, it’s hard for a firm like Apple Inc. (NASDAQ:AAPL) to continue to grow in triple digit percentages. However, its heft also allows the firm to generate massive amounts of cash that it then uses to buy back shares. Apple Inc. (NASDAQ:AAPL)’s latest share buybacks are worth $110 billion, which is more valuable than the market value of most companies. Additionally, a forward P/E ratio of 29.33 makes the stock slightly overvalued compared to the S&P 500.
Polen Capital shared some of the stresses that have plagued Apple Inc. (NASDAQ:AAPL)’s shares in 2024, which have stood out from big tech due to a rather modest 3.6% year to date gain. The fund shared in its Q1 2024 investor letter:
The largest relative contributors to the Portfolio’s performance during the first quarter were SAP, Apple Inc. (NASDAQ:AAPL) (not owned), and Amazon.
. . . .The zero weight to Apple was another notable relative contributor in the quarter. More recently, Apple has come under pressure from a confluence of issues ranging from a weak iPhone cycle, market share erosion in China, mounting regulatory pressureb around App Store fees in Europe, and a lawsuit from the U.S. Justice Department accusing the company of anticompetitive practices in its iPhone business. All this has resulted in the stock down -11% year to date, underperforming the overall Index by -19%—Apple’s worst relative performance quarter since 2013. It remains a great business and one we follow, but we’re content not owning it right now, given its growth prospects relative to its valuation.”
Apple shares currently trade at a forward PE ratio of 29 which is much higher than Alphabet’s and Meta’s forward PE ratios.
5. Visa Inc. (NYSE:V)
Number of Hedge Fund Shareholders In Q1 2024: 156
Visa Inc. (NYSE:V) is another household name, best known for its debit and credit cards. The average of 34 one year share price targets for the firm is $310.37 and the shares are rated Strong Buy on average. Visa Inc. (NYSE:V) has also beaten adjusted analyst EPS estimates in all four of its latest quarters, and it pays 52 cent quarterly dividend for a 0.76% yield. The historic Mastercard analyst note from Piper Sandler that we covered above also mentioned its larger rival Visa Inc. (NYSE:V). In the note, the firm shared that Visa Inc. (NYSE:V) can also grow its revenue by 10.7%, and along with Mastercard, target a $255 trillion market. Like Mastercard, Ramnani set an Overweight rating on Visa Inc. (NYSE:V)’s shares and ascribed then a $322 share price target.
For their March quarter of 2024 shareholdings, 156 hedge funds part of Insider Monkey’s database had bought a stake in Visa Inc. (NYSE:V). Chris Hohn’s TCI Fund Management held the most valuable stake which was worth $4.6 billion.
Visa Inc. (NYSE:V)’s price to forward earnings ratio is 27.55, making it overvalued over the market’s ratio of 21. However, its shares have appreciated by 43% over the past four years, which roughly matches the four year revenue growth of roughly 49%. This could mean that the shares hold their gains even if the economy slows down and Visa Inc. (NYSE:V)’s revenue slows. Like Piper Sandler, Wedgewood Partners also shared optimism for Visa Inc. (NYSE:V)’s future trajector in its Q1 2024 investor letter where it highlighted:
Visa stock posted a small negative drop during the quarter. In the 2irst quarter, the Company grew earnings per share +11% as payment volume growth was up +8% and cross-border payment grew a solid +16%, adjusted for currency. Beyond their consistent growth and execution, recent regulatory trends have caught considerable investor attention. The Company’s networks and value-added services drive enough economic value to bank customers and retailers that the addressable market for payments should continue growing at a healthy rate for many more years, regardless of recent regulatory changes. Visa’s value- added services can be extended to less-sophisticated, emerging non-Visa networks to help grow the overall payment ecosystem that make up the vast global payment addressable market. For example, not long after debit interchange rates were regulated last decade, Visa began an aggressive push to allow non-bank 2inancial institutions access to Visa’s networks, which helped drive more interchange volume to banks and offset lower interchange rates. This was a key element that spawned the massive “Fintech” industry that exists today. We continue to expect Visa’s scale and breadth of service offerings will help them drive attractive growth at stellar margins along with the overall payments’ ecosystem.
4. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Shareholders In Q1 2024: 186
Chip designer NVIDIA Corporation (NASDAQ:NVDA) is the most popular AI stock. The start of June 2024 was an important time for the firm as CEO Jensen Huang shared that NVIDIA Corporation (NASDAQ:NVDA) isn’t stopping with its AI chips and will launch a new Blackwell Ultra chip in 2025. Blackwell is the firm’s latest AI chip platform, and H200 chips were slated to start shipments in Q2. NVIDIA Corporation (NASDAQ:NVDA)’s latest bit of AI announcements expand on industrial uses cases of the new technology. At Computex in Taiwan, the firm revealed that NVIDIA’s AI Enterprise-IGX will now be paired with its sensor processing platform called Holoscan. NVIDIA IGX’s latest refresh boosts its AI processing capability to 1,705 trillion operations per second, allowing use cases such as astronomy and medical imaging to utilize greater computing capacities.
By Q1 2024 end, 186 hedge funds covered by Insider Monkey’s research were NVIDIA Corporation (NASDAQ:NVDA)’s stakeholders. Rajiv Jain’s GQG Partners held the most valuable stake which was worth $12 billion.
Given that NVIDIA Corporation (NASDAQ:NVDA)’s shares have gained a massive 1,756% over the past four years, the question everyone’s asking is is there any growth left? Its revenue has grown by 266% during the same time period, but NVIDIA Corporation (NASDAQ:NVDA)’s price to forward earnings ratio is 42.19 – just 2x of the S&P 500’s 21. Whether the Blackwell Ultra pushes the forward P/E up remains to be seen. Baron Fifth Avenue Growth Fund was able to keenly differentiate between the broader cyclical nature of the chip industry and NVIDIA Corporation (NASDAQ:NVDA)’s unique platform level strengths in its Q1 2024 investor letter where it shared:
It is not lost on us that semiconductors is a notoriously cyclical industry. Historically, the hyperscalers (AWS, Azure, GCP, etc.), who are among NVIDIA’s largest customers, have not invested/spent/consumed CapEx in a straight line. It will be more than a mild surprise then if there was no pullback in demand leading to a significant growth deceleration and a potentially meaningful correction in the price of the stock, sometime in the near future. So, it is incumbent upon us to manage the size of this investment appropriately, while continuing to imagine what the future will likely look like without losing sight of what reality on the ground is today.
Then again…NVIDIA is not just a semiconductor company. Many investors have missed the boat thinking that Apple is just a smartphone company, Amazon is just a retailer, and Tesla is just a car company. We have long argued that just like the other three, NVIDIA is a platform. We are more certain of this now than ever before.
3. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Shareholders In Q1 2024: 222
Alphabet Inc. (NASDAQ:GOOGL) is the holding company for Google. Despite its heft, the average of 45 one year analyst ratings is Strong Buy, and the average share price target is $191.83 – implying that Wall Street is still optimistic for its future. However, June 2024 is seeing Alphabet Inc. (NASDAQ:GOOGL) lay off people in its cloud computing division as it battles a tough economy. Stifel’s Mark Kelley increaed Alphabet Inc. (NASDAQ:GOOGL)’s share price target to $196 from $174 in May 2024. The upgrade came after a detailed April 2024 note that had increased the target to $174 from $154 and shared that the price target had factored in a 26x multiple for Alphabet Inc. (NASDAQ:GOOGL)’s NTM EPS. The note cited confidence in the growth of the advertising industry and faster US eCommerce growth as some reasons behind the bullishness.
For their March quarter of 2024 shareholdings, 222 out of the 919 hedge funds profiled by Insider Monkey had held a stake in Alphabet Inc. (NASDAQ:GOOGL). Ken Fisher’s Fisher Asset Management owned the biggest stake which was worth $6.9 billion.
Alphabet Inc. (NASDAQ:GOOGL)’s forward price to earnings ratio is 22.94, which makes it nearly evenly valued compared to the S&P 500’s price to forward earnings ratio of 21. Additionally, while Alphabet Inc. (NASDAQ:GOOGL)’s shares have gained 158% over the past four years, its revenue has grown by 68% – creating some room for a potential claw back in the share price. Baron Fifth Avenue Growth Fund praised Alphabet Inc. (NASDAQ:GOOGL)’s AI initiatives in its Q1 2024 investor letter as it shared:
Google has also taken advantage of its distribution to unlock various benefits of GenAI, such as helping advertisers generate creative content in different formats or helping them optimize their budgets across Google’s various platforms. Additional opportunities that GenAI creates for Google include improving its existing offerings (e.g., GenAI offerings for YouTube creators) and helping drive demand for Google Cloud, which now offers a managed AI service called Vertex AI. We continue to monitor the risk from GenAI disrupting search, particularly given Google’s large market share today but believe the valuation is attractive and reflects too high of a probability for a bad outcome.
Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We also believe Alphabet has further room to improve its cost discipline, given its high margin core Search business and similar efficiency measures taken at other large technology companies. All together, we believe Alphabet has a reasonable path to growing EPS at a mid-teens rate for years to come. On the back of Alphabet’s strong fundamentals and a reasonable valuation (approximately 20 times P/E (On 2025 expected EPS consensus as collected by FactSet) for a business of this dominance and quality), we decided to add Alphabet to the portfolio.
2. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Shareholders In Q1 2024: 246
Meta Platforms, Inc. (NASDAQ:META) owns Facebook, Instagram, and WhatsApp. It’s another highly rated big tech AI stock. The average of 52 one year Meta Platforms, Inc. (NASDAQ:META) share price target is $512.99 and the average rating is Strong Buy. The firm has also beaten analyst EPS estimates in all four of its latest quarters. A Strong Buy doesn’t scratch the itch? Well, consider a rather rare Sell rating on Meta Platforms, Inc. (NASDAQ:META)’s shares by BNP Paribas in May 2024. The firm took aim at Meta’s AI spending, sharing that while other big tech AI players like Alphabet have the revenue to fund it, Meta Platforms, Inc. (NASDAQ:META) might find it difficult to do so. AI spending has been a key concern for Meta Platforms, Inc. (NASDAQ:META) investors, and they have often punished the shares because of it.
As of Q1 2024 end, 246 out of the 933 hedge funds covered by Insider Monkey’s research were Meta Platforms, Inc. (NASDAQ:META)’s stakeholders. Rajiv Jain’s GQG Partners held the most valuable stake which was worth $5.5 billion.
Like Alphabet, Meta Platforms, Inc. (NASDAQ:META)’s price to forward earnings ratio is 23.63 which is nearly in line with the S&P 500’s 21. Additionally, while the revenue has grown by 57% over the past four years, the shares have appreciated by 123%, creating similar worries to Alphabet’s stock. However, Meta could benefit significantly from making its AI model Llama open source and capturing market share. While BNP Paribas is wary of Meta Platforms, Inc. (NASDAQ:META), Harding Loevner took a different tone in its Q1 2024 investor letter:
Meta’s AI-powered Advantage+ product is winning an increasing share of advertisers’ budgets, supporting the company’s continued dominance of the digital-advertising market. Meta’s content-recommendation engine also has improved engagement and monetization for the Reels video feature, as competition from TikTok abates. Netflix reported better-than-expected subscriber growth for the fourth quarter of 2023 and improving profitability, trends that management said would continue in 2024.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Shareholders In Q1 2024: 293
Microsoft Corporation (NASDAQ:MSFT) is another AI beneficiary. Its partnership with OpenAI has allowed the firm to diversify its generative AI platform and gain a foothold in the lucrative enterprise AI computing industry. Like its big tech peers, the average of 47 one year share ratings for Microsoft Corporation (NASDAQ:MSFT) is Strong Buy. The average share price target is $483, and the firm has beaten adjusted analyst EPS estimates in all four of its latest quarters. While other software players like Salesforce have suffered, RBC Capital maintained an Overweight rating on Microsoft Corporation (NASDAQ:MSFT) in May 2024 and it increased the share price target to $500 from $450. At the heart of RBC Capital’s strong bullishness was Microsoft Corporation (NASDAQ:MSFT)’s early lead in AI, which it believes stands in contrast with the firm’s Azure cloud computing platform that had had to catch up with Amazon’s AWS.
By the end of this year’s first quarter, 293 hedge funds part of Insider Monkey’s database had held a stake in Microsoft Corporation (NASDAQ:MSFT). Michael Larson’s Bill & Melinda Gates Foundation Trust owned the most valuable stake which was worth $15.3 billion.
When compared to Alphabet and Meta, Microsoft Corporation (NASDAQ:MSFT)’s forward P/E ratio of 30.96 makes it significantly overvalued compared to the broader markets. However, chief executive Satya Nadella is quite optimistic as he believes that Microsoft Corporation (NASDAQ:MSFT) is on track to earn $500 billion in revenue by 2030. Ithaka Group shared some of the reasons behind Microsoft Corporation (NASDAQ:MSFT)’s recent share price gains in its Q1 2024 investor letter. According to the fund:
Microsoft builds best-in-class platforms and provides services that help drive small business productivity, large business competitiveness, and public-sector efficiency. Microsoft’s products include operating systems, cross-device productivity applications, server applications, software development tools, video games, and business-solution applications. The company also designs, manufactures, and sells devices, including PCs, tablets, and gaming/entertainment consoles that all integrate with Azure, its cloud computing service. In the quarter Microsoft’s stock appreciated based on excitement surrounding the company’s positioning in the generative AI market and its ability to monetize the coming wave of corporate investment in supercomputing and AI, which will be through both Azure and Microsoft Copilot, the company’s new GenAI personal assistant.
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Disclosure: None.
