In this article we present the list of Diamond Hill Capital’s Top 10 Stock Picks.
Heather Brilliant’s Diamond Hill Capital is a Columbus, Ohio-based investment management firm founded in 1997 by Ric Dillon, who managed the company until 2019. Mr. Dillon and several members of his team broke off to form VELA Investment Management that year, which led to the addition of Heather Brilliant to the CEO position at Diamond Hill.
Ms. Brilliant earned an MBA from the University of Chicago Booth School of Business, as well as a degree in economics from Northwestern University. She has since accrued more than two decades of experience in the domestic and international investment markets, including nearly 14 years at Morningstar that culminated in her managing the company’s Australasia division, as well as a successful run as CEO, Americas at First State Investments.
Ms. Brilliant has taken major strides to refocus Diamond Hill in her five years at the helm of the company, closing its private asset management division and several of its investment strategies that didn’t align with the fund’s core value investing ethos. Meanwhile, the fund has bulked up its focus on long-term value and fixed income investing by reworking and growing its teams in those disciplines, and adjusting its operational processes and expectations.
In a November interview on Bloomberg’s The Close, Ms. Brilliant noted that in the current environment of earnings volatility, her team is focused on uncovering high-quality businesses trading at fair valuations. When asked about her team’s approach to investing in broader sectors experiencing secular tailwinds, specifically the utilities sector, Ms. Brilliant said that while the “story” of power-hungry AI is a good one, she was unconvinced by the valuations in the space, noting that she instead likes some of the pricing trends in the insurance space.
That was evidenced by the fund’s large-cap strategy (Q3 investor letter here) adding two big insurance names to its portfolio in Q3, a quarter in which the fund returned 7.84% net of fees, beating the benchmark Russell 1000 Index by 1.76 percentage points. That lifted its year-to-date returns to 14.7% net of fees, ahead of last year’s 13.7% return. The large-cap strategy returned 25.7% in 2021 and 32.2% in 2019.
The Diamond Hill Small Cap Fund (Q3 2024 investor letter here) also added some insurance names to its portfolio during Q3 and rattled off a solid quarter of 8.43% gains, though that trailed the benchmark Russell 2000 Index by 84 basis points. The fund has returned just under 10% annually since inception, beating the Russell 2000 by nearly 200 basis points.
There’s been relatively little volatility in Diamond Hill’s overall sector allocations over the past year, with finance stocks continuing to account for nearly a quarter of the fund’s 13F portfolio, which was valued at $24.7 billion on September 30, up from $23.4 billion at the end of June. Consumer discretionary, healthcare, and industrials stocks were next at 15.9%, 14.1%, and 13.7% exposure respectively. Tech stocks rounded out the fund’s top 5 sectors at 8.6% exposure.
In this article, we’ll take a look at the fund’s top ten holdings as of September 30 to see which stocks Heather Brilliant and her team have the strongest conviction in heading toward 2025.
Our Methodology
The following data is gathered from Diamond Hill Capital’s latest 13F filing with the SEC.
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). That’s why you should pay close attention to this important indicator.
Note: All hedge fund data is based on the exclusive group of 900+ active funds tracked by Insider Monkey that filed 13Fs for the Q3 2024 reporting period.
Diamond Hill Capital’s Top 10 Stock Picks
10. Sysco Corporation (NYSE:SYY)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $522 million
Number of Hedge Fund Shareholders (9/30/2024): 33
First up is Sysco Corporation (NYSE:SYY), which Diamond Hill raised its stake in by 12% to 6.69 million shares during Q3. The fund first built a stake in the company during Q1 and then bolstered that position by another 50% in Q2. On the other hand, the broader hedge fund industry has been bailing on the food services company in recent quarters, with overall smart money ownership of the stock down by 30% since the end of March.
Sysco Corporation (NYSE:SYY) shares have gained 16% since the middle of 2024 and the company is bullish on its growth prospects heading into 2025, a year in which it plans to return $2 billion to shareholders. Sysco reported improving traffic trends throughout Q3 (the company’s Q1 of FY25) in both its domestic and international businesses and believes it can leverage its strong balance sheet and size advantage to further scale its business.
Wells Fargo wasn’t quite as bullish on the company’s FY25 Q1 report, lowering its price target on the company to $82 from $87 amid a relatively weak industry backdrop. Though analyst Edward Kelly anticipates improved results in the second half of the company’s FY25, he does see some risk that Sysco won’t hit its guidance targets.
The Diamond Hill Mid Cap Strategy jumped on the opportunity to invest in Sysco Corporation (NYSE:SYY) at an attractive valuation, as the fund declared in its Q2 2024 investor letter:
“Despite rising valuations, we continue finding attractively valued, quality companies the market is overlooking amid its increasingly narrow focus on the mega-cap technology stocks dominating the major indices. In Q2, we introduced new positions in Sysco Corporation (NYSE:SYY), Civitas Resources, Labcorp Holdings and VeriSign.
Sysco is the US’s leading food-service distributor. We believe it is a high-quality business, and we have followed it for many years. As investors’ concerns about slowing quick-service restaurant traffic have pressured shares, we capitalized on what we believe to be a temporary headwind to initiate a position at an attractive valuation.”
9. Regal Rexnord Corporation (NYSE:RRX)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $525 million
Number of Hedge Fund Shareholders (9/30/2024): 31
Hedge fund ownership of Regal Rexnord Corporation (NYSE:RRX) shot up to an all-time high at the end of 2022 but has fallen by 26% since then. Diamond Hill has held a large position in the company throughout that time, being the largest RRX shareholder in our hedge fund database. It trimmed its stake by 1% to just under 3.17 million shares during the third quarter.
Weakening demand in its Power Efficiency Solutions and Automation & Motion Control segments led Regal Rexnord Corporation (NYSE:RRX) to cut its projected FY24 EPS view to $9.15 to $9.45 in early November, down from earlier guidance of $9.40 to $9.80. The company paid down $481 million in gross debt during the quarter as it continues an aggressive delevering push.
Analysts are split on the outlook for diversified industrial companies like Regal Rexnord in 2025. Barclays believes industrial end markets that have been under pressure this year will be slow to recover next year, while Seaport Research believes that Trump taking over the Oval Office will provide a boost for Regal Rexnord.
The TimesSquare Capital U.S. Mid Cap Growth Strategy added to its Regal Rexnord Corporation (NYSE:RRX) position in Q2 following a swoon in the stock, as the fund shared in its Q2 2024 investor letter:
“Many of our Industrials positions provide necessary business-to-business operational services, highly technical components, automation & efficiency improvements, or essential infrastructure services. Here there was a -25% showing from Regal Rexnord Corporation (NYSE:RRX), which specializes in motion control systems, climate solutions, and similar mechanical components for a variety of end markets. There were ongoing pressures on its Power Efficiency and Automation & Motion Control segments that related to destocking in the automation or HVAC end markets. Meanwhile the soon-to-be-divested Industrial Powertrain operations showed better-than-expected results, and the net results were inline revenues and earnings, though lower guidance to adjust for the divestiture. Regal’s management expects a recovery in orders later in 2024 and in the meanwhile will reduce its debt levels, so we added to our position.”
8. Caterpillar Inc. (NYSE:CAT)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $528 million
Number of Hedge Fund Shareholders (9/30/2024): 52
Hedge funds don’t seem convinced by Caterpillar Inc. (NYSE:CAT)’s strong market performance this year, as their ownership of the stock has remained relatively flat despite CAT shares rising by 33% in 2024. Diamond Hill has also trimmed its own position in the heavy machinery manufacturer by about 187,000 shares in 2024, though it remains the fund’s eighth-largest position. Ken Fisher’s Fisher Asset Management is the largest Caterpillar shareholder among the funds tracked by Insider Monkey.
While Caterpillar Inc. (NYSE:CAT) is often thought of as a stodgy heavy machinery manufacturer, the company does have some interesting exposure to AI as a supplier of backup power for data centers, which JP Morgan noted in a recent price target raise on the stock (to $515 from $500). Citi also likes Caterpillar long-term ($460 price target), but has the stock on a 90-day negative catalyst watch due to the risk of the company missing estimates in the near term. The firm believes that recent Fed cuts and stronger commodity prices will benefit Caterpillar in the long run, but that the market has jumped the gun on just how quickly those benefits will manifest on Caterpillar’s balance sheet.
The Diamond Hill Large Cap Concentrated Strategy shared the latest concerns regarding Caterpillar Inc. (NYSE:CAT)’s near-term outlook in its Q2 2024 investor letter:
“Other bottom Q2 contributors included Caterpillar Inc. (NYSE:CAT) and Home Depot. Shares of heavy construction machinery manufacturer Caterpillar fell as dealer inventories have declined and the market wrestles with concerns construction activity may be decelerating.”
7. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $564 million
Number of Hedge Fund Shareholders (9/30/2024): 58
Hedge funds took renewed interest in SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) during the third quarter, as the number of funds long SSNC jumped by 38%. Joe Milano’s Greenhouse Funds and Dmitry Balyasny’s Balyasny Asset Management were among the many funds to add SSNC to their 13F portfolios during the quarter.
SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), a provider of financial services software, grew organic revenue by 6.4% in Q3, the first time in three years it’s achieved 6% organic growth in consecutive quarters. Adjusted earnings per share also jumped by 10.1% to $1.29 in the latest quarter.
Hedge funds appear to be increasingly bullish on the company’s strong recurring revenue stream (80%), its diversified portfolio of software solutions, and its low leverage, which could allow it to fund further acquisitions. SS&C completed its $670 million acquisition of Battea-Class Action Services at the end of Q3, adding a market-leading provider of settlement recovery services to its portfolio.
Giverny Capital Asset Management sold off SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) late last year primarily due to one major mistake, as the fund reported in its Q4 2023 investor letter:
“It’s a bit like two neighbors, both young and with excellent incomes. If one diligently saves a good portion of their income, dollar cost averages regularly into the stock market, pays a little extra on the mortgage every month and avoids credit card debt, while the other dabbles in exotic investments, is on a first-name basis with a local bookie and maxes out credit cards at the holidays, we have a pretty good idea which household will be richer at age 65, no matter who earns more money over their careers.
It’s the same for companies. Earnings power matters, but not more than capital allocation. I thought about this for a while and sold SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) in the third quarter. This is a fine business with a history of making smart acquisitions. But recently the decision to use floating rate debt to finance acquisitions when interest rates were at historical lows has been a costly mistake. SS&C is growing modestly, but its earnings are stagnant because incremental cash flow must be dedicated to higher interest charges.
Selling SS&C and Markel, which were each about 4% of the portfolio, was not easy for me. Both businesses trade for reasonable prices and have good competitive positions. They have strong CEOs who have been in the job for many years. CEO Bill Stone founded SS&C and is a billionaire thanks to his own decisions. Tom Gayner at Markel is a well-regarded stock market investor and a much-admired leader.”
6. HCA Healthcare, Inc. (NYSE:HCA)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $608 million
Number of Hedge Fund Shareholders (9/30/2024): 70
Diamond Hill and the broader hedge fund industry alike were paring back their positions in HCA Healthcare, Inc. (NYSE:HCA) during Q3 following the stock’s strong performance during the first nine months of 2024. Diamond Hill unloaded 5% of its HCA stake during Q3 to leave it with just under 1.5 million shares. The stock has dipped by 22.6% in Q4, giving back more than half of its year-to-date gains.
HCA Healthcare, Inc. (NYSE:HCA) operates over 2,000 healthcare facilities and has gradually increased its market share in the U.S. over the past decade. That figure currently stands at 27%, which the company plans to grow to 29% by the end of the decade. The company recently backed its FY24 revenue guidance of $69.75 billion to $71.75 billion, as well as its adjusted EPS view of between $21.60 and $22.80 in earnings, despite the disruptions caused by two major hurricanes hitting the U.S in the span of less than two weeks.
Analysts are bullish on hospitals in 2025 after a very strong year in 2024, though there is some concern surrounding Republicans sweeping into office and what effect that will have on the Affordable Care Act and enhanced exchange subsidies.
The Diamond Hill Large Cap Strategy is bullish on the improving macro fundamentals of HCA Healthcare, Inc. (NYSE:HCA), as the fund discussed in its Q1 2024 investor letter:
“Among our top individual contributors in Q1 were American International Group (AIG) and HCA Healthcare, Inc. (NYSE:HCA). Health care facilities operator HCA Healthcare benefited from a strong demand environment for hospitals in Q4, which is expected to continue into 2024 as nursing labor costs normalize and companies are able to improve margins tied to above-average physician costs. As a best-in-class operator with unique assets in favorable geographies, we believe the outlook for HCA Healthcare from here is favorable.”
5. Texas Instruments Incorporated (NASDAQ:TXN)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $642 million
Number of Hedge Fund Shareholders (9/30/2024): 60
Shares of Texas Instruments Incorporated (NASDAQ:TXN) have gained 12.9% since the end of March, which coincided with a 15.4% rise in hedge fund ownership of the semiconductor manufacturer during the middle two quarters of 2024. The stock was one of Diamond Hill’s top contributors in Q2 and the fund left its stake largely untouched during Q3, ending the quarter with just over 3.11 million shares.
Texas Instruments Incorporated (NASDAQ:TXN) is a global leader in the analog chip space, which powers the mechanical heart of many automated machine processes, most notably in the industrial and automotive sectors. Recent volatility in those segments drove the company’s overall revenue down by 8% to $4.15 billion in Q3, while profitability sagged by double digits across several metrics.
The company is confident that its current investments centered around boosting 300mm wafer production will pay off in the future, as evidenced by the recent awarding of up to $1.6 billion in funding through the U.S. CHIPS and Science Act. Wells Fargo has a $215 price target and ‘Equal Weight’ rating on TXN shares, citing a lack of visibility into when demand for the company’s chips will reaccelerate.
The Diamond Hill Select Strategy likes Texas Instruments Incorporated (NASDAQ:TXN)’s long-term outlook, as revealed in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon, Texas Instruments Incorporated (NASDAQ:TXN) and Mr. Cooper Group. Shares of semiconductor manufacturing company Texas Instruments rose in Q2 as demand in several of the company’s end markets show signs of recovering. Given the company’s long-term prospects, competitive positioning and scale advantages, we believe the outlook for the company from here is strong.”
4. Bank of America Corporation (NYSE:BAC)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $676 million
Number of Hedge Fund Shareholders (9/30/2024): 102
Hedge fund ownership of Bank of America Corporation (NYSE:BAC) has risen by 20% over the past two quarters as money managers appear to have grown more comfortable with the investment firm’s asset allocation and risk profile. Warren Buffett remains the largest Bank of America shareholder in our hedge fund database despite cutting his stake by 23% to just under 798 million shares in Q3.
Buffett and other money managers like Bank of America Corporation (NYSE:BAC) for its vast economic moat, strong customer retention, and consistent profitability. A sharp rise in interest rates over the past three years certainly hasn’t hurt on the profitability front, as Bank of America’s net interest income has jumped by 30% to $55.7 billion over the trailing 12 month period ended September 30. That said, BofA’s diluted EPS has actually declined by 10% over the past year and could benefit from a boost to the economy that could be triggered by a drop in interest rates in 2025.
The ClearBridge Value Equity Strategy likes Bank of America Corporation (NYSE:BAC)’s prospects for growth as the fund discussed in its Q1 2024 investor letter:
“We added several new positions during the quarter. Our largest new addition was Bank of America Corporation (NYSE:BAC), one of the world’s leading financial institutions, serving some 66 million consumer and small business clients across the U.S. as well as large corporations, financial institutions and governments globally. We believe that the interest rate pressure that Bank of America faced in early 2023 has subsided, and risks surrounding deposit outflows have abated, which should allow the company to improve its book value and capital growth as well as benefit from a rebound of capital markets activity.”
3. ConocoPhillips (NYSE:COP)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $717 million
Number of Hedge Fund Shareholders (9/30/2024): 67
Shares of ConocoPhillips (NYSE:COP) dipped by 8% during Q3, which prompted Diamond Hill to add to its COP position during the quarter, raising its stake by 20% to 6.81 million shares. Ken Fisher’s Fisher Asset Management as well as Vince Maddi and Shawn Brennan’s SIR Capital Management were among the other funds to significantly boost their stakes in Conoco during the quarter, by 60% and 120% respectively.
Hedge funds and analysts alike are exceedingly bullish on ConocoPhillips (NYSE:COP)’s $22.5 billion acquisition of Marathon Oil, which was completed in November. The company expects to achieve more than $1 billion in cost and capital synergies in the first year and plans to pass the bulk of those gains on to shareholders through share repurchases and dividend hikes.
ConocoPhillips is a ‘Top Stock to Watch’ at Jefferies, which has a ‘Buy’ rating and $146 target on COP shares. The firm likes Conoco’s strong balance sheet and believes the market is misjudging the company’s ability to generate a strong and sustainable free cash flow yield. Morgan Stanley likewise notes that while Conoco’s free cash flow slightly trails peers, its growth prospects are also stronger. The firm has a $128 price target and ‘Overweight’ rating on the stock.
The Invesco Growth and Income Fund is bullish on ConocoPhillips (NYSE:COP)’s May acquisition of Marathon Oil as the fund shared in its Q2 2024 investor letter:
“Stock selection in the industrials and health care sectors detracted from relative performance during the quarter. Selection and an underweight in consumer staples also hurt relative return as the sector was one of just two index sectors with a positive return for the quarter. ConocoPhillips (NYSE:COP): The company announced its acquisition of Marathon Oil in May. The deal is expected to increase earnings and will increase the scale of Conoco’s production assets. However, the stock traded lower on the news.”
2. Abbott Laboratories (NYSE:ABT)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $762 million
Number of Hedge Fund Shareholders (9/30/2024): 64
Abbott Laboratories (NYSE:ABT) has been one of Diamond Hill’s major holdings dating all the way back to 2014, and has featured as the fund’s top stock pick on multiple occasions. The fund raised its stake in Abbott by 9% during Q3, with the holding jumping from 4th to 2nd among its top stock picks as a result.
Abbott Laboratories (NYSE:ABT) has an extensive portfolio of medical devices and diagnostic tests that are relied upon for conditions both severe and relatively benign. The company has exhibited strong overall growth despite the continued decline in sales of its Covid-19 testing kits, with organic sales growing by 8.2% year-over-year in the third quarter when excluding that unit. Overall revenue rose by 4.9% during the quarter to $10.6 billion.
Despite its standing as a Dividend King, Abbott has not skimped in the slightest when it comes to further growing its dividend payments to shareholders. It recently raised its quarterly payout by another 7.3% to $0.59 per share, pushing its overall dividend growth to 60% since 2020. Barclay’s expects the company’s earnings to grow by about 11% annually between 2024 and 2026, excluding the small contribution from the Covid unit, so Abbott should have no difficulty covering the increased payouts to shareholders.
The Diamond Hill Select Strategy discussed why it likes Abbott Laboratories (NYSE:ABT) in the fund’s Q2 2024 investor letter:
“Abbott Laboratories (NYSE:ABT) is a diversified health care company with an extensive portfolio that spans medical devices, pharmaceuticals, nutritionals and diagnostics. With a substantial portion of its revenues generated internationally, emerging markets contribute about 40% of overall sales. We have always liked Abbott’s diverse mix of businesses and its fundamental growth prospects. The management team has consistently demonstrated skill in capital allocation, highlighted by strategic divestitures such as the European generic business in 2014, and significant acquisitions like St. Jude in 2016.”
1. American International Group, Inc. (NYSE:AIG)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $1.0 billion
Number of Hedge Fund Shareholders (9/30/2024): 51
American International Group, Inc. (NYSE:AIG) remained Diamond Hill Capital’s top stock for the 16th straight quarter as of the end of Q3. The fund raised its stake in the investment bank by 6% during the quarter, pushing the value of its position to just over $1 billion. Several other hedge funds grew bearish on AIG during Q3 however, as there was a 20% dip in ownership of the stock.
American International Group, Inc. (NYSE:AIG) delivered strong Q3 results, growing after-tax income per diluted share by 18% year-over-year to $1.23, beating estimates by more than 10%. Despite that performance, AIG shares traded down post earnings, in part due to lowered net interest income guidance for Q4. The insurer also guided for a 10% return on equity this year, which Wells Fargo projects will rise to 10.3% next year and 10.8% in 2026. Wells has a $76 price target and ‘Equal Weight’ rating on AIG shares.
It’s no wonder Diamond Hill loves AIG, as the stock was one of the Diamond Hill Large Cap Strategy’s top performers during the first quarter of this year, as relayed in the fund’s Q1 2024 investor letter:
“Among our top individual contributors in Q1 were American International Group, Inc. (NYSE:AIG) and HCA Healthcare. Property and casualty insurance company AIG made more progress selling its stake in life insurer Corebridge in the quarter while repositioning its portfolio via several divestitures — lending support to our thesis that the high-quality management team will continue executing a turnaround in the business.”
Overall, American International Group, Inc. (NYSE:AIG) ranks first among Diamond Hill Capital’s Top 10 Stock Picks. While we acknowledge the potential of AIG, 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 AIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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