In this article, we discuss the 5 best diversified stocks to invest in. If you want to read our detailed analysis of these stocks, go directly to the 10 Best Diversified Stocks to Invest In.
5. Honeywell International Inc. (NASDAQ: HON)
Number of Hedge Fund Holders: 57
Honeywell International Inc. (NASDAQ: HON) is ranked fifth on our list of 10 best diversified stocks to invest in. The company operates as a diversified technology and manufacturing firm. It is headquartered in North Carolina.
On July 26, investment advisory Deutsche Bank maintained a Buy rating on Honeywell International Inc. (NASDAQ: HON) stock and raised the price target to $251 from $245. Nicole DeBlase, an analyst at the firm, issued the ratings update.
At the end of the second quarter of 2021, 57 hedge funds in the database of Insider Monkey held stakes worth $1.8 billion in Honeywell International Inc. (NASDAQ: HON), up from 56 the preceding quarter worth $1.7 billion.
In its Q1 2021 investor letter, ClearBridge Investments, an asset management firm, highlighted a few stocks and Honeywell International Inc. (NASDAQ: HON) was one of them. Here is what the fund said:
“The portfolio’s quality bias and valuation discipline have generated compelling returns over time with typically strong relative results in more challenging environments as it did through the first three quarters of 2020. However, that same quality bias tends to create a more challenging relative performance environment for the Strategy during periods of sharp economic acceleration, which tend to benefit stocks that are more commodity linked or of lower quality. This has been the case during the vaccine- and stimulus-driven rally experienced late last year and during the most recent quarter. Sectors that lagged in the quarter included industrials, Honeywell also lagged in the quarter after previously generating strong returns over extended periods.”
4. General Electric Company (NYSE: GE)
Number of Hedge Fund Holders: 67
General Electric Company (NYSE: GE) is a Massachusetts-based industrial company that also has interests in the technology business. It is placed fourth on our list of 10 best diversified stocks to invest in.
On May 19, investment advisory Barclays reiterated an Overweight rating on General Electric Company (NYSE: GE) stocks and raised the price target to $16 from $15, noting the improvement in aviation data as a growth catalyst for the firm in the near-term.
At the end of the second quarter of 2021, 67 hedge funds in the database of Insider Monkey held stakes worth $6.08 billion in General Electric Company (NYSE: GE), down from 68 in the previous quarter worth $6.16 billion.
In its Q1 2021 investor letter, Vulcan Value Partners, an asset management firm, highlighted a few stocks and General Electric Company (NYSE: GE) was one of them. Here is what the fund said:
“General Electric is outperforming our expectations for 2021 as the economic recovery is occurring faster than expected. We are particularly pleased with its free cash flow generation. We are happy to own it in our portfolio.”
3. Danaher Corporation (NYSE: DHR)
Number of Hedge Fund Holders: 78
Danaher Corporation (NYSE: DHR) is a Washington-based firm that markets professional, medical, industrial, and commercial products and services. It is ranked third on our list of 10 best diversified stocks to invest in.
On August 4, investment advisory Credit Suisse assumed coverage of Danaher Corporation (NYSE: DHR) stock with an Outperform rating and a price target of $306. Katie Tryhane, an analyst at the advisory, issued the ratings update.
At the end of the second quarter of 2021, 78 hedge funds in the database of Insider Monkey held stakes worth $6.4 billion in Danaher Corporation (NYSE: DHR), down from 81 in the previous quarter worth $5.7 billion.
In its Q2 2021 investor letter, Cooper Investors, an asset management firm, highlighted a few stocks and Danaher Corporation (NYSE: DHR) was one of them. Here is what the fund said:
“During the quarter the Fund’s largest holding Danaher made a notable acquisition, spending US$9bn (~5% of its market cap) to buy privately held Aldevron, a leading player in the fast growing field of genomic medicine. Over the years Danaher has built up a unique portfolio of life science and diagnostic assets. Their key life sciences businesses involve providing the tools and services to research, develop and manufacture biotech drugs. For example, they are a key provider to over 400 COVID vaccine and therapeutic projects globally.
Aldevron expands Danaher’s capability into gene therapy. Aldevron is a supplier of key ingredients for the next generation of therapies, namely cell and gene therapy and mRNA vaccines. Aldevron is the leader in these fields and this deal puts Danaher in pole position to participate in the wave of innovation occurring in this space.
The acquisition multiple is high – Danaher are paying US$9bn for what today is a US$500m revenue business but growing 30% a year with 40% operating margins, in our view justifying the high price. Importantly, management can see an investment return in line with recent acquisitions. As a reminder Danaher’s history and skill set is acquiring businesses, it is how the company has been successfully built over 35 years. The shares were up 4% on the news and have gained nearly 20% for the quarter. Most companies would be sold down off the back of an announcement like this but Danaher has a long multidecade track record of successful acquisitions and this fits a similar enough pattern.
The opportunity is to grow Aldevron into a multibillion dollar business given the growth in genomics and RNA innovation that’s occurring and as more of these types of therapeutics become approved. Overall as a key supplier with deep global networks across life sciences and medical research Danaher is very well placed to continue growing with the innovation in biotech and diagnostic markets. It remains an incredibly well run company and a high conviction investment in the Fund.”
2. Berkshire Hathaway Inc. (NYSE: BRK-B)
Number of Hedge Fund Holders: 116
Berkshire Hathaway Inc. (NYSE: BRK-B) is placed second on our list of 10 best diversified stocks to invest in. The company has interests in the insurance, freight rail transportation, and utility businesses. It operates from Nebraska.
On August 9, investment advisory UBS maintained a Buy rating on Berkshire Hathaway Inc. (NYSE: BRK-B) stock and raised the price target to $329 from $319, underlining that the earnings beat of the firm in the second quarter was driven by a cyclical rebound.
At the end of the second quarter of 2021, 116 hedge funds in the database of Insider Monkey held stakes worth $22.3 billion in Berkshire Hathaway Inc. (NYSE: BRK-B), up from 111 in the preceding quarter worth $19 billion.
In its Q1 2021 investor letter, Vltava Fund, an asset management firm, highlighted a few stocks and Berkshire Hathaway Inc. (NYSE: BRK-B) was one of them. Here is what the fund said:
“Despite the considerable rise in stock markets over the past year, there are still many attractive opportunities. Human nature also is playing a bit into our hands. Investor crowds often chase popular stocks, hot IPOs, or mysterious SPACs and completely leave aside stocks they consider boring and not sexy enough. A typical example of this category is our long-term largest position in Berkshire Hathaway. Since we bought it for the first time, its price has nearly quadrupled and yet it remains just as undervalued today as it was at that time. Considering the current rate at which it is buying back its own shares and the amount of cash that Berkshire Hathaway has, my greatest wish as a shareholder is for the company’s share price to remain as low as possible for as long as possible.”
1. Amazon.com, Inc. (NASDAQ: AMZN)
Number of Hedge Fund Holders: 271
Amazon.com, Inc. (NASDAQ: AMZN) is ranked first on our list of 10 best diversified stocks to invest in. The firm operates from Washington as a diversified technology firm with interests in other sectors like publishing and health.
On July 30, investment advisory Canaccord maintained a Buy rating on Amazon.com, Inc. (NASDAQ: AMZN) stock with a price target of $4,400, underlining that the firm will show robust revenue growth in the next two years.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Citadel Investment Group is a leading shareholder in Amazon.com, Inc. (NASDAQ: AMZN) with 3.8 million shares worth more than $13 billion.
In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:
“Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.
Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.
The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’
Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.
Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.
In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:
- Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.
- Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising,
Amazon Studios, Prime Video, Prime Music, M&A.
- Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce)
business.
- Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole
Foods.
Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.
We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”
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