In this article, we discuss the 5 best Roth IRA stocks hedge funds are buying. If you want to read our detailed analysis of these stocks, go directly to the 10 Best Roth IRA Stocks Hedge Funds are Buying.
5. The Walt Disney Company (NYSE: DIS)
Number of Hedge Fund Holders: 134
The Walt Disney Company (NYSE: DIS) is a California-based mass media and entertainment firm. It is placed fifth on our list of 10 best Roth IRA stocks hedge funds are buying. The company’s shares have offered investors returns exceeding 46% over the course of the past twelve months. On July 13, investment bank Morgan Stanley reiterated an Overweight rating on the stock and underlined that the firm was building content assets to take advantage of the new streaming business with platforms like Disney+.
On June 14, investment advisory Tigress Financial maintained a Buy rating on The Walt Disney Company (NYSE: DIS) stock with a 12-month price target of $227, underlining that the firm had performed well during the pandemic and was well positioned for post-pandemic recovery.
At the end of the first quarter of 2021, 134 hedge funds in the database of Insider Monkey held stakes worth $12.5 billion in The Walt Disney Company (NYSE: DIS), down from 144 in the preceding quarter worth $16.4 billion.
In its Q4 2020 investor letter, Harding Loevner, an asset management firm, highlighted a few stocks and The Walt Disney Company (NYSE: DIS) was one of them. Here is what the fund said:
“One of the original constituents of the Nifty Fifty holds a place in our portfolio today. When we bought Disney three years ago, we wrote that “we view Disney theme parks in the US, Europe, and China as resistant to online substitution.” We did not reckon on a pandemic, which closed all of them, and sent all of usto our couches. Disney, however, wasready for us, brilliantly illustrating the importance of management foresight and change management. Or, as Louis Pasteur said, “chance favors the prepared mind.
A century after its founding in 1923, Disney is in the middle of a bold shift from its legacy media networks & entertainment model—with cable TV, theme parks, and theater films dominating its earnings—to a direct-to-consumer streaming media model. The keys to Disney’s transition: matchless storytelling, coupled with financial strength. The company reliably creates content that people all over the world are eager to consume. It also hastened spending on original content to attract subscribers to its new streaming platform. These factors have allowed Disney to weather the pandemic having expanded its direct engagement with customers. Such connections yield a rich harvest of insights used to customize offerings on a mass scale, reinforcing that engagement in a virtuous circle and thereby raising the lifetime value of each customer. Subscribers to Disney+ reached 86.8 million one year after launch, compared to the 60 – 90 million management projected to reach in 2024. To be sure, Netflix, Apple, and Amazon remain formidable competitors in new-era streaming entertainment (mind what we said about everyone standing up at once), but there’s fight left in this old dog.”
4. Mastercard Incorporated (NYSE: MA)
Number of Hedge Fund Holders: 151
Mastercard Incorporated (NYSE: MA) is ranked fourth on our list of 10 best Roth IRA stocks hedge funds are buying. The stock has offered investors returns exceeding 18% over the course of the past year. The company is based in New York and provides payments services. On July 13, the firm announced that it had partnered with telecom provider Verizon to expand the reach of contactless shopping, autonomous checkout, and cloud point of sale solutions, using new 5G technology, on the payments network of the former.
On July 15, investment advisory Baird maintained an Outperform rating on Mastercard Incorporated (NYSE: MA) stock and raised the price target to $482 from $454, affirming that it expected the firm to beat market estimates for earnings in the second quarter.
Out of the hedge funds being tracked by Insider Monkey, Virginia-based investment firm Akre Capital Management is a leading shareholder in Mastercard Incorporated (NYSE: MA) with 5.8 million shares worth more than $2 billion.
In its Q4 2020 investor letter, Bretton Fund, an asset management firm, highlighted a few stocks and Mastercard Incorporated (NYSE: MA) was one of them. Here is what the fund said:
“While consumers resumed much of their spending by summer, what and how they used their Visas and Mastercards changed. For obvious reasons, people shifted to contactless payments—one of the Covid-era changes we think is permanent—and replaced travel purchases with online shopping and food delivery. Consumers spent more on their debit cards and less on their credit cards; Visa and Mastercard make more per transaction on the latter. They also make more on cross-border transactions that come mostly from international travel, which ground to a halt early in the pandemic. Visa’s and Mastercard’s earnings per share fell by 7% and 16%, respectively, compared to their usual mid-teens growth. We’re not too worried, and we think they’ll catch up nicely in the post-vaccine world. Visa’s stock returned 17.1% and Mastercard’s 20.2%.”
3. Alphabet Inc. (NASDAQ: GOOG)
Number of Hedge Fund Holders: 159
Alphabet Inc. (NASDAQ: GOOG) is a California-based technology company that owns the internet search engine Google. It is placed third on our list of 10 best Roth IRA stocks hedge funds are buying. The company’s shares have returned 64% to investors over the past year. On July 15, money manager Wedgewood Partners identified the stock as one of the few firms that had long-term revenue and profitability drivers. The fund told investors in a letter that the firm had the ability to enhance returns by returning net cash to shareholders.
On June 24, investment advisory Stifel maintained a Buy rating on Alphabet Inc. (NASDAQ: GOOG) stock with a price target of $2,700, highlighting that a decision by the tech firm to phase out third party cookies would push out near-term headwinds for ad-tech companies.
Out of the hedge funds being tracked by Insider Monkey, London-based investment firm TCI Fund Management is a leading shareholder in the firm with 2.9 million shares worth more than $6.1 billion.
In its Q1 2021 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Alphabet Inc. (NASDAQ: GOOG) was one of them. Here is what the fund said:
“Large-cap tech companies have been resilient through the pandemic—Alphabet among them. A top contributor, Alphabet’s Play Store and Google Cloud are in demand as businesses accelerate online activity which, along with strong YouTube user growth, is helping stabilize temporarily weaker search ad revenue trends. Through the lens of our disciplined bottom-up research process, we view Alphabet as one of the best businesses in the world, capable of expanding revenues at a rapid rate for years to come, with a bullet proof balance sheet and an average asking price. It’s a name we’ve owned since 2012 and for which we continue to have high hopes regarding future prospects.”
2. Amazon.com, Inc. (NASDAQ: AMZN)
Number of Hedge Fund Holders: 243
Amazon.com, Inc. (NASDAQ: AMZN) stock has returned 9.7% to investors over the past year. It is ranked second on our list of 10 best Roth IRA stocks hedge funds are buying. The company operates as a technology company with a focus on internet-based services such as ecommerce and data management support. The owner of the company, Jeff Bezos, is set to take a flight into space on July 20 with his brother onboard a spacecraft developed by Blue Origin, a private space company owned by Bezos.
On July 19, investment advisory Mizuho maintained a Buy rating on Amazon.com, Inc. (NASDAQ: AMZN) stock with a price target of $4,400, noting a positive outlook for the company in the advertising sector for the rest of the fiscal year.
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 3.3 million shares worth more than $10.5 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.”
1. Microsoft Corporation (NASDAQ: MSFT)
Number of Hedge Fund Holders: 251
Microsoft Corporation (NASDAQ: MSFT) is placed first on our list of 10 best Roth IRA stocks hedge funds are buying. The company’s shares have returned 30% to investors over the past twelve months. The firm is a technology company focusing on the software sector and operates from Washington. On July 15, investment advisory Jefferies praised the Windows 365 platform of the company, noting that it had the potential to be the next killer product from the software giant that already has many growth catalysts working in its favor.
On July 16, investment advisory Mizuho maintained a Buy rating on Microsoft Corporation (NASDAQ: MSFT) stock and raised the price target to $310 from $285, highlighting firms enabling digitization continued to perform well in the post-pandemic economy.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Microsoft Corporation (NASDAQ: MSFT) with 23.9 million shares worth more than $5.6 billion.
In its Q1 2021 investor letter, Polen Capital, an investment management firm, highlighted a few stocks and Microsoft Corporation (NASDAQ: MSFT) was one of them. Here is what the fund said:
“We have written extensively about Microsoft in recent commentaries. It was our leading contributor last year and one of our largest weightings within the Portfolio. It continues to experience business momentum through several dominant, essential, and competitively advantaged businesses, like Office 365 and Azure. The markets it competes for are enormous, which gives the company the ability to compound at scale. In the past quarter alone, the company generated over $40 billion in revenue, representing a 17% growth rate. The inherent operating leverage in Microsoft’s business model continues and led to 34% earnings growth this past quarter. Despite the broad rotation we saw in the first quarter and Microsoft’s robust performance in 2020, we think its business fundamentals continue to exhibit strength, and the stock continues to reflect the fundamentals.”
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