Analysts Love These Two Dividend Aristocrats but How Does the Smart Money Feel about Them?

McDonald’s Corporation (NYSE:MCD) and Johnson & Johnson (NYSE:JNJ) are each up more than 1.4% in early morning trade on the back of analyst upgrades. Analysts at Credit Suisse have upgraded McDonald’s Corporation (NYSE:MCD) to ‘Outperform’ from ‘Neutral’, and bumped up their target price to $112 from $100, while analysts at Deutsche Bank upgraded Johnson & Johnson (NYSE:JNJ) to ‘Buy’ from ‘Hold’ and assigned a price target of $110 per share. In this article, we will take a closer look at the upgraded stocks and see if the smart money sees the same potential in them as the analysts do.

We mention the hedge fund activity concerning McDonald’s and Johnson & Johnson because our research has shown that historically hedge funds’ stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6.0 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).

Analysts at Credit Suisse upgraded McDonald’s Corporation (NYSE:MCD) citing stronger same-store sales trends. McDonald’s stock has lagged its peers in recent years as its same-store sales have stalled. The analysts at Credit Suisse believe the chain’s third quarter sales will be positive and reverse the negative sentiment around the stock. Overall, eight analysts have ‘Buy’ ratings, nine have ‘Hold’ ratings, and one has a ‘Sell’ rating on the leading restaurant chain.

Like analysts, hedge funds are bullish on McDonald’s Corporation (NYSE:MCD). According to our data, 81 hedge funds owned $6.28 billion worth of the company’s stock (representing 6.90% of the float) on June 30, versus 89 funds and $6.83 billion respectively at the end of March. Among them, Southeastern Asset Management, which pruned its stake by 10% to 9.87 million shares was the top shareholder, followed by Jonathon Jacobson’s Highfields Capital Management, which kept its position unchanged at 9.8 million shares. On the other hand, s. Zach Schreiber’s Point Sate Capital established a new position of 4.55 million shares while Israel Englander’s Millennium Management increased its stake by 34% on the quarter to 2.74 million shares.

Analysts at Deutsche Bank upgraded Johnson & Johnson (NYSE:JNJ) after meeting with the company’s management. The analysts came away more confident on Johnson & Johnson’s growth prospects and believe the company has plenty of liquidity to pursue accretive mergers and acquisitions that unlock value for shareholders. Although Johnson & Johnson has a large drug portfolio, its stock has been relatively unscathed from the recent biotech sell off. Six analysts have ‘Buy’ ratings, eight have ‘Hold’ ratings, and one has a ‘Sell’ rating on the healthcare giant, with a consensus price target of $107.58 between them.

Hedge funds are bullish on Johnson & Johnson (NYSE:JNJ). A total of 78 hedge funds owned $4.38 billion of the company’s stock (representing 1.60% of the float) at the end of the second quarter, versus 77 funds and $4.58 billion respectively on March 31. Ken Fisher‘s Fisher Asset Management increased its position by 2% to 10.64 million shares, followed by Donald Yacktman’s Yacktman Asset Management, which trimmed its exposure by 12% to 7.44 million shares. Moreover, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital added 1.27 million shares to its stake, taking it to 1.31 million shares reported as of the end of June.

Like analysts and hedge funds, we’re bullish on McDonald’s and Johnson & Johnson. The two companies have raised their yearly dividends by 25 consecutive years or more. They were profitable during the financial crisis and most likely will be profitable during the next recession. The two companies have deep moats, earn great returns on capital, and are shareholder friendly. Although McDonald’s is up just 5% year to date and Johnson & Johnson is down 10%, the two stocks are recommended for any long term investor.

Disclosure: None