Five Consumer Non-Durables Stocks That Hedge Funds Love

After nine years of keeping the interest rates unchanged, the US Federal Reserve finally hiked interest rates by 0.25 percentage points last month. While experts believe that the rate hike will impact the consumer durable and non-durable sectors in the US, the effect is expected to be marginal. Moreover, most analysts believe that this time the rate-hike cycle would be quite gentle compared to the past, such that it won’t negatively affect consumer spending in the short to medium-term. With this in mind, we have compiled a list of the top consumer non-durables stocks based on the number of hedge funds out of the 730 funds we cover that had long position in them at the end of September. Read further to know which are the five stocks that topped our list this time around.

An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like a fund with the knowledge and resources of Visium can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests, whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012 (read the details here).

#5 PepsiCo, Inc. (NYSE:PEP)

– Hedge Funds with Long Positions (as of September 30): 57

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $6.74 billion

After trading in the $90-$100 range for over a year, shares of the food and beverage giant PepsiCo, Inc. (NYSE:PEP) broke the coveted $100 figure for the first time recently, but have again gone back to trading below that level. Despite being a behemoth with a market capitalization of over $100 billion, PepsiCo, Inc. (NYSE:PEP)’s current annual dividend yield of  2.90% is better than what several small- and medium-sized companies sport.

Notwithstanding the recent decline, shares of PepsiCo currently trade at forward price to earnings multiple of 20.08 and price to book multiple of 10.49, which is significantly above its historical average. Last month the company made a series of announcement targeted at health-conscious consumers. However, health experts are skeptical about whether the company actually intends to make its products healthier or if it’s just a PR gimmick, which they believe can backfire.

PepsiCo is expected to report its fiscal 2015 fourth-quarter earnings early next month. Analysts estimate that the company will be reporting EPS of $1.06 on revenue of $18.61 billion for the quarter, lower than the EPS of $1.12 on revenue of $19.95 billion it had reported for the same quarter a year earlier. Of the 26 major brokerages and analysts who cover the stock, the majority have an ‘Overweight’ rating. Ken Griffin‘s Citadel Investment Group nearly doubled its stake in PepsiCo, Inc. to 3.6 million shares during the July-September period.

#4 Nike Inc (NYSE:NKE)

– Hedge Funds with Long Positions (as of September 30): 59

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $4.5 billion

Nike Inc (NYSE:NKE)’s stock saw a gradual rise since the start of 2015 and was among the few large-cap stocks that ended the year with significant gains (up by over 30%). This outperformance has definitely helped the stock gain more popularity with two more funds covered by Insider Monkey adding Nike Inc (NYSE:NKE) to their portfolios and the aggregate value of these funds’ holdings increased by over 30% during the third quarter.

On December 22, the company reported its fiscal 2016 second quarter results, declaring EPS of $0.90 on revenue of $7.69 billion. For the same quarter of the previous year, the company reported EPS of $0.74 on revenue of $7.40 billion. Two days following the earnings release, Nike Inc (NYSE:NKE)’s stock underwent a previously announced 2-for-1 stock split. Since the split materialized, shares of the company have been trending lower. The $0.16 per share quarterly dividend the company currently provides translates into an annual dividend yield of 1.09% at current levels.

Most analysts that cover Nike’s stock have a ‘Buy’ rating with an average price target of $73.09, which represents a potential upside of  24% from the stock’s current price. Billionaire Andreas Halvorsen‘s Viking Global was one of the hedge funds that initiated a stake in the company during the third quarter, reporting nearly 1.77 million shares.

#3 Constellation Brands, Inc. (NYSE:STZ)

– Hedge Funds with Long Positions (as of September 30): 64

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $4.87 billion

Shares of alcoholic beverage maker Constellation Brands, Inc. (NYSE:STZ) have had a phenomenal sevenfold increase since the second-half of 2012 and are up by over 45% year-to-date. This explains why two more funds among those we cover held long positions in the company at the end of September and the aggregate value of their holdings in the company shot up by $738 million during the third quarter.

On January 7, shares of Constellation Brands, Inc. (NYSE:STZ) shot up by 4.5% after it reported better than expected  numbers for the third quarter of fiscal 2016. While analysts had expected the company to report EPS of $1.30 on revenue of $1.62 billion, it declared EPS of $1.42 on revenue of $1.64 billion. This impressive performance was largely driven by the strength of the company’s beer business which saw a 8% and 20%  year-over-year increase in revenue and profit respectively during the third quarter. Moreover, the growth of the beer business was also a major reason why the operating margin of the company increased to 29% of sales from 27% a year earlier.

Following the earnings release, on January 8, analysts at Stifel Nicolaus reiterated their ‘Buy’ rating on Constellation Brands’ stock and also increased their price target to $174 from $162. Billionaire Stephen Mandel’s Lone Pine Capital initiated a huge stake in Constellation Brands during the third quarter by purchasing over 4.6 million shares of the company.

#2 Mondelez International Inc (NASDAQ:MDLZ)

– Hedge Funds with Long Positions (as of September 30): 69

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $6.88 billion

Confectionery giant Mondelez International, Inc (NASDAQ:MDLZ) emerged as one of the favorite stocks among activist hedge funds last year. Apart from Nelson Peltz‘s Trian Partners, activist investor Bill Ackman‘s Pershing Square also now holds a big position in Mondelez International Inc (NASDAQ:MDLZ) having acquired around 43 million shares during the third quarter. In its third quarter letter to its shareholders, Pershing Square revealed that Mondelez was its largest equity position at that time and it maintains its belief that “the opportunity for productivity improvement and margin expansion at Mondelez is vast – the largest in the large cap consumer packaged goods sector.”

Due to the involvement of such prominent investors, experts believe Mondelez International will be able to improve its profit margins at an even more rapid pace than it has done in the last six quarters. Moreover, there are also rumors that activist investors will push Mondelez International to do an M&A deal soon. Mondelez International’s stock currently trades at a price-to-earnings multiple of 7.99, which is significantly lower than the industry average of 22.66.

On January 7, analysts at Deutsche Bank downgraded the stock to ‘Hold’ from ‘Buy’ and lowered their price target to $48 from $49, which represents a potential upside of 18% from the stock’s current price. Although shares of Mondelez International remained almost flat during the third quarter, 20 more funds covered by us became bullish on the company and their holdings in the company increased by over $2 billion during the same period.

#1 Molson Coors Brewing Company (NYSE:TAP)

– Hedge Funds with Long Positions (as of September 30): 70

– Aggregate Value of Hedge Funds’ Holdings (as of September 30): $3.07 billion

Finally, the over 20% jump that its stock had in September has helped Molson Coors Brewing Company (NYSE:TAP) to emerge as the winner in this list. Though only 4 additional funds reported owning a stake in it during the third quarter, the aggregate value of funds’ holding in the company increased by over 45% during the same period. Shares of the company are currently trading very near to the lifetime high they made last month and most analysts on the Street expect this bull run to continue.

Due to the $107 billion Anheuser-Busch InBev NV and SABMiller Plc merger announced in November, Molson Coors Brewing Company (NYSE:TAP) was able to buy the rest 58% stake in the MillerCoors joint venture from SABMiller Plc for $12 billion. SABMiller Plc agreed to sell its stake in the joint venture due to fears that it might create regulatory hurdles in its merger with Anheuser-Busch InBev NV. Molson Coors Brewing Company (NYSE:TAP) currently boasts of a respectable annual dividend yield of 1.84% and experts believe that the company will be able to continue paying quarterly dividends to its shareholders despite the heavy toll the MillerCoors joint venture deal will put on its balance sheet.

Analysts forecast that the company will report EPS of $0.55 on revenue of $850 million for the fourth quarter next month. For the same quarter last year, Molson Coors had reported EPS of $0.55 on revenue of $973.80 million. Billionaire Dan Loeb‘s Third Point more than doubled its stake in the company to over 2.2 million shares during the third quarter.

Disclosure: None