We recently compiled a list of the Goldman Sachs’ Best Hedge Fund Stock Picks: Top 20 Stocks. In this article, we are going to take a look at where Apple Inc. (NASDAQ:AAPL) stands against Goldman Sachs’ other hedge fund stock picks.
The close of August has marked a highly awaited paradigm shift on Wall Street that investors have been wishing for months. This shift comes after Federal Reserve Chairman Jerome Powell finally admitted that the time for interest rate cuts had come. Investors rejoiced and the flagship S&P index gained 1.15% while the Dow’s blue chip stock index added 1.14% to its value.
Before the Fed chair’s remarks, investment bank Goldman Sachs had already taken a detailed look at the implications of interest rate cuts on the stock market. In a podcast, the bank’s trading strategy head Josh Schiffrin started by explaining that the prospect of the Fed reducing rates was linked “very closely to the performance of short-term bonds.” He however added that it’s “really been bonds that have been responsive, where the story has been quite clear,” pointing out that “the stock market has been range bound and choppy with a fair amount of rotation between different sectors” which leads to index level moves being “muted.” This makes sense when we consider the Dow and S&P’s movements following Powell’s latest comments, as the one percentage point gain for each indicated that investors were well prepared for rate cuts even before the Fed Chair took the stand.
Speaking of the flagship S&P index, GS’ head of American Equity Sales Trading John Flood shared some insights at the June close. Starting off by highlighting the drives of the index’s performance during the first half of the year, Flood outlined that when it came to hedge funds, artificial intelligence and GLP-1 were the two key trends that had driven index returns. He described it as “a long momentum trade” with “both cohorts” of the hedge fund side, namely the “systemic and fundamental long-short” fully involved in trading.
The Goldman equity head also added that retail investors were finally back as well, and they were focused on “focused on the ten biggest stocks in the world.” You can see which companies these might be by reading 20 Largest Companies in the World by Market Cap in 2024. One key concern among investors and analysts alike this year has been a bifurcation in market returns that has seen only the best performers yield most of the rewards. This was also on the mind of analysts from another well known Wall Street bank, who added that it created an opportunity for further profits. Flood shared that while five stocks accounted for “60% of S&P 500’s return year to date,” this sharp divide did not make him uncomfortable.
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The investor flood of optimism surrounding AI, which has pushed the shares of the top AI GPU designer in the world to post an unbelievable 321,150% in all time returns, has also led to worries that the market might be witnessing another period akin to the ill fated dotcom era of the 1990s. When asked whether this period reminded him of that time, Flood replied that his firm felt “a little bit more like 1995 than 1999. And 1995 clearly was a very positive year for the stock market and a positive run,” particularly since “valuations and earnings from market leaders are way friendlier today than they were in 1999.” Concluding by sharing that he felt “very bullish” the analyst also forecast his estimate for the flagship S&P. His estimate? Well, Flood believes that “you could see S&P 500 trade well north of 6,000 this year as the biggest get bigger and we continue to just see a little bit of a news vacuum into the elections right now.”
The bit about market bifurcation between big and small companies was also on the mind of GS’ senior US portfolio strategist Ben Snider. He commented on the jump in small cap stocks in July when they gained as much as 2% while other indexes lost up to 1.98% due to investors positioning themselves for potential interest rate cuts. Snider explained that small cap stocks tend to take on more debt, and lower rates coupled with their lower market values lead to big gains. According to him “if just 1% of assets comes out of the S&P 500 and flows into, for example, the Russell 2000 Small Cap Index, that 1% of S&P 500 market cap would represent more than 15% of Russell 2000 market cap.” Coming back to AI, the Goldman strategist has a tip for those who might be worried that the hype surrounding AI might be more than the technology’s ability to generate money for the firms that plan to plow a trillion dollars into it. He shared that as opposed to the market cap weighted benchmark S&P, it might be prudent to invest in the equal weight variant “if you are concerned about the degree of concentration or AI investment.”
Speaking of AI, GS was also out with a detailed report in July which analyzed the year to date returns of different AI sectors. The AI stack, broadly speaking, is made up of four categories of firms. Starting from the bottom of the pyramid and moving upwards, these are chip manufacturers and designers, those that provide AI capacity like server farms, firms that sell AI products, and finally, companies that will see the largest gains from the ubiquitous or near ubiquitous adaptation of AI. As per GS, the year to date returns of these four sectors as of late July were 139% (represented only by the top AI GPU stock), 22%, -2%, and 2% respectively. One of the strongest performers within the AI infrastructure segment is utilities, and there’s further room ahead as analyst Ryan Hammond believes that “after adjusting valuations for the improvement in long- term EPS growth expectations that the sector has experienced, Utilities’ PEG (P/E to long term growth (LTG)) ratio is 2x, well below the historical average of 3x.”
So, with GS taking a broad view of the market, we decided to see which hedge fund stocks the bank is a fan of.
To make our list of Goldman Sachs’ top hedge fund stocks, we ranked the bank’s list of stocks with the number of hedge funds that, according to its data, had the stock as a top ten holding.
We also mentioned the total number of hedge funds that had bought these stocks as per Insider Monkey’s data. 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).
A wide view of an Apple store, showing the range of products the company offers.
Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Investors in Q2 2024: 184
GS’ Number Of Funds: 43
Apple Inc. (NASDAQ:AAPL) is the biggest and most valuable consumer technology company in the world. Roughly 52% of its nine month revenue ending June, or $155 billion out of $296 billion came from the sales of its iPhone smartphone lineup. This means that the phone is key to Apple Inc. (NASDAQ:AAPL)’s hypothesis and is baked into the share price. This is based on investor belief that Apple Inc. (NASDAQ:AAPL)’s design strengths and robust ecosystem allow the firm to rely on its user base of roughly 1.5 billion users as of 2023 regularly upgrading its smartphones. This ensures that the iPhone continues to bring in billions of dollars in revenue annually. Apple Inc. (NASDAQ:AAPL) benefits from its world class design and engineering facilities which have also allowed it to reduce dependence on third party suppliers for key components such as smartphones and notebook processors. Apple Inc. (NASDAQ:AAPL)’s $61.5 billion in cash and equivalents also means that it can splurge on developing new products to maintain its competitive edge.
Baron Funds mentioned Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter. Here is what the firm said:
“Recent Activity This quarter we re-initiated a position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shis, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on- device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
Overall AAPL ranks 5th on our list of Goldman Sachs’ hedge fund stock picks. While we acknowledge the potential of AAPL as an investment, our conviction lies in the belief that some 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 AAPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
