In this piece, we will take a look at Goldman Sachs’ best hedge fund stock picks and the top 20 stocks.
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.
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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).
20. Tenet Healthcare Corporation (NYSE:THC)
Number of Hedge Fund Investors in Q2 2024: 64
GS’ Number Of Funds: 14
Tenet Healthcare Corporation (NYSE:THC) is one of the largest hospital operators in the US. A key differentiating factor for the firm, when compared to its peers in the hospital industry, is Tenet Healthcare Corporation (NYSE:THC)’s focus on outpatient surgery care. This is a niche within the healthcare industry, and due to the significantly lower number of overnight stays in this model, coupled with the high prices of surgeries, it allows Tenet Healthcare Corporation (NYSE:THC) to boost its margins when compared to operating expensive hospitals. The firm has also been busy these days by raising capital through selling its hospitals to increase focus on the outpatient strategy. Another key benefit of the outpatient surgery center strategy is that it can allow Tenet Healthcare Corporation (NYSE:THC) to establish a foothold in the market where many different providers operate. This can provide it with a competitive advantage through brand recognition and lower costs.
Baron Funds mentioned Tenet Healthcare Corporation (NYSE:THC) in its Q2 2024 investor letter. Here is what the firm said:
“We established a small position in Tenet Healthcare Corporation, a leading provider of health care services. Tenet’s care delivery network includes United Surgical Partners International (USPI), which operates over 600 ambulatory surgical centers (ASCs), surgical hospitals, and other outpatient facilities. Tenet also operates over 50 acute care and specialty hospitals, as well as Conifer, a leading provider of revenue cycle management services. The combination of ASCs and hospital assets in local markets gives USPI a negotiating advantage with payors and vendors, supporting industry leading ASC operating margins. Tenet management has been divesting its less competitively positioned acute care hospitals and other non-core assets to focus on its ASC business. The $90 billion outpatient surgical market is enjoying strong secular tailwinds driven by aging U.S. demographics and the shi of procedures to lower cost outpatient settings. Outpatient procedures cost roughly 50% less than those done in hospitals and are preferred by both patients and physicians. Estimates are that an incremental $60 billion worth of cases are appropriate to be done outpatient, which should drive multi-year mid-single-digit same store growth for USPI – a combination of both higher acuity and volumes – enhanced by de novo projects and M&A in a highly fragmented space. Tenet’s hospital sales have been executed at attractive multiples with the proceeds used to pay down debt. As Tenet’s faster growing ASC business increases as a percentage of the company’s overall cash flows, we believe the company’s valuation multiple has room to expand.”
19. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Investors in Q2 2024:
GS’ Number Of Funds: 14
Alibaba Group Holding Limited (NYSE:BABA) is one of China’s biggest eCommerce firms that is also one of the biggest technology conglomerates in the world. Estimates show that the firm holds at least 40% of the merchandise shipments in China, which provides it stability against the economic downturn that’s plaguing the country right now. Alibaba Group Holding Limited (NYSE:BABA)’s other businesses, such as its cloud computing division create a high growth income stream that also benefits from recurring revenues with low margins. At the same time, the firm’s technological resources also enable it to lead in new technologies, such as its Alimama tool that enables brands to use AI to improve their marketing on Alibaba Group Holding Limited (NYSE:BABA)’s eCommerce platform. However, the cyclical nature of its industry and the rise of new upstarts like PDD mean that the firm has to innovate continuously or risk losing market share. Analysts expect Alibaba Group Holding Limited (NYSE:BABA) to earn $9.85 in EPS in its FY2026, for a forward P/E ratio of 8.27. This is significantly lower than its American peers, and it reflects market sentiment about Chinese stocks.
O’keefe Stevens Advisory mentioned Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter. Here is what the firm said:
“It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business.
All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23. All investments carry risks; some can be diversified away, and others cannot. While incremental investments and spending will likely lead to margin compression, this is a necessary step to stabilize and potentially regain market share. The risk of continued market share loss from Pinduoduo (Temu), JD.com, Shein, and Douyin is shown below. Alibaba’s Chinese market share has declined from 78% in 2015 to 44% in 2022 and 40% in 2023.”
