In this piece, we will take a look at the stocks with the highest consensus return on equity (ROE) according to Goldman Sachs.
As the fourth quarter of 2024 settles in, the narrative surrounding stocks on Wall Street is starting to shift. This is unsurprising since the beginning of the Federal Reserve’s interest rate cycles stands to change economic conditions in America. These will naturally affect businesses, and cyclical stocks along with financials should see an improved outlook.
For instance, consider two reports by investment bank Morgan Stanley. One of these was released before the interest rate cut, and it covered the bank’s thoughts about the stock market and the US economy for September. The other came in October, after the rate cut. In its September report, MS laid out three scenarios for the flagship S&P index’s performance for the rest of this year. The best case scenario posits that the index would close at 5,650 points in the near term, while the “attractive” and “fair” scenarios predict a closing of 5,200 and 5,350 points, respectively. Yet, the market has outperformed even the best scenario, as its recent reading is 5,764.
The bank also shares that inflation is finally dropping in America. This fact is explained through the S&P’s second quarter earnings performance. In fact, the shifting inflationary trends have set new highs for a decade when we consider sales and earnings surprises for the index according to MS. Its data shows that when inflation was soaring in Q4 2022, the net of positive and negative EPS surprises stood in lowest quintile since businesses struggled with costs. This was despite the fact that during the same time period the net of positive and negative revenue surprises was in the 70% percentile. However, now that inflation has dropped, data for the second quarter earnings season shows that the EPS surprise was in the uppermost quintile (above 80%) while the revenue surprise had dropped to roughly 35%. This data covers the past ten years, and as a result, it illustrates the momentous shifts that the market is undergoing right now.
Since interest rates are the hottest topic on Wall Street, MS also commented on its expectations for them. At the September start, the bank posited that markets were expecting 100 basis points of cuts by 2024 end. The bank shared that it thought “this looks aggressive unless the U.S. economy has a hard landing, but this is not our base case.” With September’s 50 basis points cut out of the way, these expectations have remained unchanged as the CME Fed Watch Tool shows that for the Fed’s November and December meetings, the market has set the probabilities for a 25 basis point cut in each at 85.5% and 82.1%, respectively. These cuts are important for determining the market’s direction, as MS’ data shows that when economic activity as measured by the ISM Manufacturing Index sat at ~67 in 2010, the S&P’s 12 month total return was 30%.
Shifting gears to the October report, MS cautions that while historically equities have outperformed following the first Fed rate cut, elevated valuations, and “consensus forecasting of EPS acceleration rather than decline, equities upside after the first cut may prove more limited this cycle.” The bank’s key stock market insight from its October report comes through its comments about cyclical stocks, though. MS shares that as upward economic growth surprises softened from April through August, “sector and factor trends skewed defensive, consistent with softer economic growth.” However, this might not be the case moving forward, as shown by the Citi Global Economic Surprise Index. MS outlines that this index had bottomed out in August with a ~-25 reading, which had jumped to roughly -12 in September. This trend was mirrored in the difference between global cyclical and defensive sectors, with the reading also moving upward as the economic surprises jumped.
These factors are key when we analyze Goldman Sachs’ list of stocks with the highest expected ROE since the bank believes that stock quality will be determined by economic growth and economic rates. The bank also recently upped its 2024 closing target for the S&P to 6,000 points. This was the fourth revision of its target and a sizeable increase from the previous estimate of 5,600 points. This increase was also accompanied by optimism for the index’s earnings. GS now believes that S&P’s 2025 earnings will sit at $268, for a 4.7% revision from the previous estimate of $256. Its 2024 estimate is unchanged, though, and its value of $241 implies that earnings next year will grow by 11.2%.
As for the next 12 months, GS believes that the S&P will sit at 6,300 points, for an 8.9% growth over its recent value of 5,779. As MS’ data pointed out that EPS surprises are growing as inflation tames, Goldman is also of a similar view. This is because the bank’s chief US equity strategist David Kostin shares that the upward EPS revision is reflective of the fact that the “macro backdrop remains conducive to modest margin expansion, with prices charged outpacing input cost growth.” In a later note, the analyst outlined that “Over the past year, performance of several quality factors has tracked the broad trajectory of market views on growth and monetary policy.” Kostin added that “A positive jobs print could prompt some investors to rotate out of expensive ‘quality’ stocks into less-loved lower quality firms as the market would likely price lower odds of substantial labor market weakening.”
So, with the narrative on Wall Street now firmly driven by economic expectations, let’s take a look at the list of stocks with the highest consensus ROE according to Goldman Sachs’ compilation.
Roman Tiraspolsky/Shutterstock.com
Our Methodology
To make our list of Goldman Sachs’ stocks with the highest consensus ROE, we used the bank’s latest list of 50 such stocks and chose those with a 5% or higher consensus ROE.
For these stocks, we also mentioned the number of hedge fund investors. 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).
42. CarMax, Inc. (NYSE:KMX)
Consensus ROE: 5%
Number of Hedge Fund Investors in Q2 2024: 35
CarMax, Inc. (NYSE:KMX) is an American used car retailer. The firm provides used cars and financing for the vehicles. Its stock is up by a modest 1.6% over the past twelve months and is down 6.6% year to date. This is unsurprising given the glut that the US auto industry has suffered from due to high rates and high inflation. As the number of new unsold cars on lots grows, their prices drop which also affects the market for CarMax, Inc. (NYSE:KMX)’s vehicles. Additionally, its presence in the auto financing market has meant that the firm has had to struggle with non performing loans because of high interest rates. However, over the long term, CarMax, Inc. (NYSE:KMX)’s market presence as indicated by $25.9 billion in trailing twelve month revenue means that the firm has adequate resources to benefit from a recovery. It also enables the company to target the growing trend of online used car retailing as smaller firms that are the majority in the US used car market often lack the resources to develop an omnichannel strategy.
Alphyn Capital mentioned CarMax, Inc. (NYSE:KMX) in its Q2 2024 investor letter. Here is what the fund said:
“CarMax, previously a winning investment for us, has disappointed us recently. As per the discussion at the start of this letter, I am re-underwriting my thesis carefully. Two key factors impacted CarMax: the rise of online competitors like Carvana and franchised dealerships entering the used car market and a post-pandemic environment with higher financing costs and less affordable cars. Their traditional brick-and-mortar, no-haggle model, while successful historically, faced challenges. In response, CarMax invested significantly in omnichannel offerings and technology to enable efficient car sourcing from consumers and dealers in a supply-constrained market. While this strengthens their long-term position, it has put temporary pressure on profits. Moreover, CarMax prioritizes consistent margins per car (~$2,500), which has impacted sales volume in recent quarters compared to competitors focused primarily on sales growth.
The used car market will eventually normalize, which should lead to positive operational leverage in CarMax from its recent investments. The company benefits from long-tenured management that has successfully navigated difficult macro conditions before. Management has shown adaptability with the omnichannel rollout and willingness to experiment with auto financing for lower-credit customers. I am carefully assessing the risk-reward against cash and other opportunities that I am looking into.”
41. Tesla, Inc. (NASDAQ:TSLA)
Consensus ROE: 5%
Number of Hedge Fund Investors in Q2 2024: 85
Tesla, Inc. (NASDAQ:TSLA) is the dominant player in the global electric vehicle industry. Along with EVs, the firm also makes other products such as energy storage equipment to enable building owners to rely on solar energy for their power. However, 84% of Tesla, Inc. (NASDAQ:TSLA)’s revenue comes from electric vehicles, which makes the stock vulnerable to downswings in the cyclical product category. This has also been the case lately, with the stock down 3% year to date and 8.6% over the past year. The drops are due to a slowdown in the EV industry stemming from high interest rates and weakening demand. Additionally, Tesla, Inc. (NASDAQ:TSLA) has long enjoyed the status of being one of the few large scale EV makers in the world. However, with new companies entering the market, the firm will have to leverage existing economies of scale to compete on the cost front – a strategy that could erode margins and affect profitability. During this critical period, Tesla, Inc. (NASDAQ:TSLA)’s scale, as is evident by its 1.85 million EV production capacity in 2023, its sizeable data repository of 1.3 billion miles for training autonomous systems, and a semi diversified business that saw energy storage revenue double to $3 billion in Q2 should come to the firm’s aid. However, Goldman was of mixed mind after Tesla’s We, Robot event as it criticized a lack of detail for business plans but sounded optimistic about the humanoid robot prototype Optimus.
Baron Funds mentioned Tesla, Inc. (NASDAQ:TSLA) in its Q2 2024 investor letter. Here is what the fund said:
“As discussed in the Fund’s prior shareholder letter, the fears about Tesla’s products were misplaced. Instead of the company being exclusively dependent on limited vehicle models and software advancement, the company announced it will more rapidly introduce products that appeal to a wider audience. It also demonstrated that its price reductions were the result of efficiencies rather than only to spur demand. Margins exceeded expectations. And the company’s integration of its hardware with proprietary AI software should facilitate full self-driving capabilities and subsequent new revenue streams. This integration of hardware with software creates a dynamic growth company as it more fully explores its potential with Optimus, humanoid robotics. The combination of these catalysts resulted in Tesla’s stock increasing meaningfully and rapidly in the second half of the quarter. This stock price momentum has continued into the next period”
40. Salesforce, Inc. (NYSE:CRM)
Consensus ROE: 5%
Number of Hedge Fund Investors in Q2 2024: 117
Salesforce, Inc. (NYSE:CRM) is a specialty software as a service (SaaS) company. The firm provides customer relationship management products and services. It is the dominant player in its industry and commanded a 21.7% market share in 2023. This allows Salesforce, Inc. (NYSE:CRM) to benefit from a wide customer base, and for its hypothesis, it means that the firm has to focus on cost control and customer retention as opposed to growth which drives most SaaS valuations. Salesforce, Inc. (NYSE:CRM)’s scale also allows it to offer customers 8 trillion data points through its Data Cloud platform to run their customer campaigns. In an AI era where data is oil, its platform enables Salesforce, Inc. (NYSE:CRM)’s customers to rely on vast repositories for their operations. Salesforce, Inc. (NYSE:CRM) manages a whopping 250 petabytes of data, but investors are concerned about its ability to land large high value deals to further beef its margins and increase recurring revenue.
One way Salesforce, Inc. (NYSE:CRM) is trying to assuage these concerns is by using Data Cloud to land big deals. Here’s what management shared during the Q1 2025 earnings call:
“Data Cloud gives every company a single source of truth and you can securely power AI insights and actions across the entire Customer 360.
Now let me tell you why I’m excited about Data Cloud and why it’s transforming our customers and how it’s preparing them for this next generation of artificial intelligence. Data Cloud was included in 25% of our $1 million plus deals in the quarter. We added more than 1,000 data cloud customers for the second quarter in a row. 8 trillion records were ingested in the Data Cloud in the quarter, up 42% year-over-year and we processed 2 quadrillion records, that’s a 217% increase compared to last year. Over 1 trillion activations drove customer engagement, which is a 33% increase year-over-year. This incredible growth of data in our system and the level of transactions that we’re able to deliver, not just in the core system but especially in data cloud is preparing our customers for this next generation of AI.”
39. Monolithic Power Systems, Inc. (NASDAQ:MPWR)
Consensus ROE: 5%
Number of Hedge Fund Investors in Q2 2024: 35
Monolithic Power Systems, Inc. (NASDAQ:MPWR) is a specialty semiconductor company headquartered in Kirkland, Washington. The firm makes and sells power conversion, voltage control, and other associated chips. These products mean that Monolithic Power Systems, Inc. (NASDAQ:MPWR) is a key enabler of data centers that have seen robust investor attention during the AI era. As a result, its shares are up 91% over the past year and 55% year to date. The optimism surrounding Monolithic Power Systems, Inc. (NASDAQ:MPWR)’s stock is also rooted in its revenue as between 2020 and 2023, the firm has grown sales by a whopping 116% to $1.8 billion. In fact, the revenue growth has continued up until Monolithic Power Systems, Inc. (NASDAQ:MPWR) latest quarter, i.e., Q2 which saw the firm post revenue of $507.4 million for a 10.8% annual growth. Its enterprise data segment saw sales jump by 217% in Q1 and accounted for 33% of the revenue. However, a caveat remains in the form of an inventory glut. If demand for AI data centers slows down then Monolithic Power Systems, Inc. (NASDAQ:MPWR) might have to slow its volume shipments to let inventory stabilize.
ClearBridge Investments mentioned Monolithic Power Systems, Inc. (NASDAQ:MPWR) in its Q2 2024 investor letter. Here is what the fund said:
“Another top individual contributor was Monolithic Power Systems, Inc. (NASDAQ:MPWR), in the IT sector, which makes semiconductor-based power electronics for the computing and storage, automotive, industrial, communications and consumer markets. Continued demand for AI-related companies and beneficiaries and anticipation of greater demand for data center components such as power management hardware for CPUs helped drive strong performance in the quarter. We believe Monolithic is one of the most attractive semiconductor plays within the SMID universe and that the company will continue to gain share in analog semiconductors as it wins design contracts.”
38. Tyler Technologies, Inc. (NYSE:TYL)
Consensus ROE: 5%
Number of Hedge Fund Investors in Q2 2024: 27
Tyler Technologies, Inc. (NYSE:TYL) is a Texas based software company which primarily caters to the needs of the public sector. Some public entities that it serves include governments, courts, and schools. Tyler Technologies, Inc. (NYSE:TYL) allows customers to manage payments, billings, record management, and application development. Its focus on the public sector means that the software company is relatively insulated from the otherwise cyclically driven downtrends in the software industry. Consequently, Tyler Technologies, Inc. (NYSE:TYL)’s stock is up 45% year to date and 51% over the past twelve months especially as its presence in the public sector application development industry means it can allow governments and related entities to launch AI applications. On the non AI front, the trend in the government to accelerate cloud and SaaS deployment has picked up speed with a record $1.34 billion in cloud spending in 2023. This places Tyler Technologies, Inc. (NYSE:TYL) in a favorable position to benefit from multiple government upgrades particularly given the recent push toward efficiency.
Carillon Tower Advisors mentioned Tyler Technologies, Inc. (NYSE:TYL) in its Q2 2024 investor letter. Here is what the fund said:
“Tyler Technologies, Inc. (NYSE:TYL) provides software for state and local governments with a focus on enterprise resource planning (ERP), courts and justice, public safety, and payments. The company delivered solid results for the quarter, with strong sales of recurring subscription revenue and with profitability poised to increase as temporary, elevated data center costs are reduced in the quarters ahead. We remain optimistic that the company will benefit from healthy state and local budgets, driven in part by infrastructure spending.”
37. Adobe Inc. (NASDAQ:ADBE)
Consensus ROE: 6%
Number of Hedge Fund Investors in Q2 2024: 107
Adobe Inc. (NASDAQ:ADBE) is a software company that is one of the most well known firms of its kind. It offers productivity software and tools such as image editing and document reading products. Adobe Inc. (NASDAQ:ADBE)’s brand name coupled with its business model enables it to earn high margin revenue and beef up sales through subscription revenue. Consequently, the firm’s hypothesis depends on the broader business environment, with heightened economic activity leading to greater subscriptions. Adobe Inc. (NASDAQ:ADBE) also benefits from being able to target AI products and services. These have driven its narrative in 2024, with the stock tumbling by 30% between February and May after investors were unconvinced about Adobe Inc. (NASDAQ:ADBE)’s ability to introduce AI into its products. Since then, the shares are up by 11% after the company introduced AI tools such as Firefly and AI Assistant. Yet, Adobe Inc. (NASDAQ:ADBE)’s shares fell by 9% in September after its midpoint Q4 guidance of $5.25 billion missed Wall Street estimates by $5.61 billion – indicating that high growth and nothing else is driving investor sentiment.
Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:
“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
36. Universal Health Services, Inc. (NYSE:UHS)
Consensus ROE: 6%
Number of Hedge Fund Investors in Q2 2024: 46
Universal Health Services, Inc. (NYSE:UHS) is one of the biggest healthcare facility operators in the US. The firm operates hospitals, outpatient care centers, and other facilities. The firm benefits from diversification to an extent, as it also offers tertiary services such as health insurance, pharmacy, and purchasing management. Universal Health Services, Inc. (NYSE:UHS)’s diversified business model enables the firm to target high growth hospital management markets such as acute care and behavioral health. These are among some of the firm’s fastest growing business. Starting with acute care, Universal Health Services, Inc. (NYSE:UHS) grew admissions in acute care by 5.6%, 4.5%, and 3.4% during Q4 2023, Q1 2024, and Q2 2024. Similarly, behavioral revenue grew by 7.2%, 10.4%, and 11% during the same three respectively quarters. Consequently, much of the market’s optimism surrounding Universal Health Services, Inc. (NYSE:UHS) stock is built on these businesses, as the shares are up by 36% year to date. However, on a bearish note, the company is also facing legal through an indirect subsidiary that has been ordered to pay $360 million in damages.
Universal Health Services, Inc. (NYSE:UHS) is continuing to invest in its acute care segment. Here’s what the firm shared during the Q2 2024 earnings call:
“In our acute care segment, we continue to develop additional inpatient and ambulatory care capacity. We currently have 27 operational freestanding emergency departments as well as 12 more, which have been approved and are in various stages of development. Also, construction continues on our de novo acute care hospitals consisting of the 150-bed West Henderson Hospital in Las Vegas, Nevada, which is expected to open late this year. The 136 bed Cedar Hill Regional Medical Center in Washington, D.C. which is expected to open in the spring of 2025, and the 150-bed Alan B. Miller Medical Center in Palm Beach Gardens, Florida, which is expected to open in the spring of 2026.”
35. Mohawk Industries, Inc. (NYSE:MHK)
Consensus ROE: 6%
Number of Hedge Fund Investors in Q2 2024: 40
Mohawk Industries, Inc. (NYSE:MHK) is a specialty building products company. The firm makes and sells tiles, roofing, and flooring products. Consequently, Mohawk Industries, Inc. (NYSE:MHK)’s fate is tied to the broader construction industry. This sector thrives when interest rates are low as building companies are able to undertake ambitious construction projects. Yet, Mohawk Industries, Inc. (NYSE:MHK) has remained a standout in the industry as its stock is up 51% year to date. These gains come on the back of a 28% jump in July after the building products company’s second quarter earnings emphasized tight management cost control. During the quarter, while Mohawk Industries, Inc. (NYSE:MHK)’s revenue dropped by 5.1% to $2.8 billion, its earnings per share grew by 9% annually and beat analyst estimates. Management added that the firm should recognize $25 million in additional cost savings this year.
Ariel Investments mentioned Mohawk Industries, Inc. (NYSE:MHK) in its Q2 2024 investor letter. Here is what the fund said:
“In contrast, manufacturer and distributor of floorcovering products, Mohawk Industries, Inc. (NYSE:MHK) underperformed this quarter, as consumer demand and pricing remain under pressure due to secular headwinds in the housing market. In a difficult environment, management is successfully executing on cost savings and productivity initiatives, while also preparing the business for share gains as demand recovers. In our view, MHK’s healthy balance sheet and progress managing through economic cycles position the company to benefit from long-term growth in residential remodeling, new home construction and commercial projects.”
34. The Cigna Group (NYSE:CI)
Consensus ROE: 7%
Number of Hedge Fund Investors in Q2 2024: 66
The Cigna Group (NYSE:CI) is one of the biggest insurance companies in America. The firm operates primarily through pharmacy and health insurance benefits management. Within these, pharmacy is the dominant entity on The Cigna Group (NYSE:CI)’s income statement. This is because during H1 2024, $87.1 billion out of its $117.7 billion in revenue, or 74%, were from this business line. Consequently, The Cigna Group (NYSE:CI) has to ensure that it continues to manage high volumes through pharmacies, as its network of 62,000 outlets means that lowering volumes can erode economies of scale and increase costs. The firm is aware of this, and it has diversified its pharmacy business to include high growth and nascent industries such as specialty pharmacies. These pharmacies are key in today’s rapidly evolving healthcare industry as not only do new medicines such as sickle cell treatments provide The Cigna Group (NYSE:CI) with the potential to ship high value drugs, but generics of weight loss drugs carry the potential for high volume medicine flow through its network.
The Cigna Group (NYSE:CI)’s commented on the specialty business during the Q2 2024 earnings call:
“In Accredo, our specialty business, our growth continues to be fueled by secular tailwinds as well as Accredo’s differentiated strength which makes us the market leader in the space. Biosimilars, for example, represent a force of change and a substantial opportunity for continued growth and impact. At the end of June, we began dispensing our interchangeable biosimilar for Humira. Our program has zero dollar out-of-pocket cost for patients, saving them on average $3,500 per year. To deliver these savings, we have agreements in place with multiple manufacturers that will produce biosimilars for Evernorth pharmaceutical distributor, Quallent Pharmaceuticals. Now the biosimilar opportunity goes well beyond Humira. By 2030, we expect an additional $100 million of annual specialty drug spend in the U.S. will be subject to biosimilar and generic competition.
And Accredo is well positioned to deliver differentiated value for our clients, customers and patients.”
33. PTC Inc. (NASDAQ:PTC)
Consensus ROE: 7%
Number of Hedge Fund Investors in Q2 2024: 39
PTC Inc. (NASDAQ:PTC) is a Boston based software company. Its products are geared towards a variety of different industries, such as retail, industrial, logistics, and software development. As a result, PTC Inc. (NASDAQ:PTC)’s is dependent on the broader economic health and outlook which is tied closely with the Fed’s interest rates. This makes it unsurprising that the stock is up. by 3.7% since the Fed cut rates by 50 basis points in September. Being a software firm also allows PTC Inc. (NASDAQ:PTC) to benefit from margin heavy recurring revenue, and despite the industrial slowdown in 2024, the firm’s fiscal Q3 saw it grow recurring revenue by 12% annually. Provided that PTC Inc. (NASDAQ:PTC)’s management aims to add $85 million in sequential new ARR in its Q4, the firm has to grow the share of high value deals in its portfolio. Any misses on this front could spell weakness.
Madison Investments mentioned PTC Inc. (NASDAQ:PTC) in its Q1 2024 investor letter. Here is what the fund said:
“PTC was one of our oldest portfolio holdings (~23 years!) and best performing stocks. We made our initial investment in PTC in 2001(in those days the company’s full name was Parametric Technology Corporation) after the dot com crash when the stock had an equity market value of approximately $1billion. We sold our final share near an equity market value of approximately $22billion. When we first initiated the investment position, we saw an attractively valued software company that provided very sticky, difficult to replace design software for engineers in the manufacturing sector. Over that 20-year span, PTC has grown both organically and through strategic M&A into one of the most vital design software engineering platforms in the world. Companies like BMW, Rockwell International, Medtronic, Hitachi, Boeing, Airbus, Volvo, Cannondale, Toyota, and GM all use PTC to design, collaborate and maintain the lifecycle of their franchise products and platforms. This investment illustrates not only the financial potential and opportunity of small cap investing but also our PMV process to identify and capitalize on strategic assets like PTC.”
32. Super Micro Computer, Inc. (NASDAQ:SMCI)
Consensus ROE: 8%
Number of Hedge Fund Investors in Q2 2024: 47
Super Micro Computer, Inc. (NASDAQ:SMCI) is a Taiwan based networking and server products provider. In today’s AI era which has increased industry interest in data centers, the firm’s business model means that it can be one of the key AI enables. As a result, Super Micro Computer, Inc. (NASDAQ:SMCI)’s shares had gained 316% between January and March and 97% between January and late August before a short seller report claimed accounting manipulations and other improprieties. Since then, the stock is down 16% and has failed to move upward despite the fact that Super Micro Computer, Inc. (NASDAQ:SMCI) recently announced that it is delivering 100,000 liquid cooled GPUs to AI factories every year. Some of this pessimism appears to be stemming from a delayed annual report filing, as investors appear to be waiting to learn about the results of the firm’s internal control investigations.
Artisan Partners had some interesting comments about Super Micro Computer, Inc. (NASDAQ:SMCI) during its Q2 2024 investor letter. Here is what the fund said:
“Super Micro Computer manufactures server racks for central processing units and GPUs that have experienced an artificial intelligence-driven uptick in demand from its cloud and enterprise customers. This company has been on our radar for years, and we met with them in our Milwaukee offices in early 2023. However, we don’t consider the stock investable given corporate governance issues.
31. Netflix, Inc. (NASDAQ:NFLX)
Consensus ROE: 8%
Number of Hedge Fund Investors in Q2 2024: 103
Netflix, Inc. (NASDAQ:NFLX) is an online streaming and production company. It is the biggest firm of its kind in the world courtesy of an early mover advantage that has enabled it to build a sizeable market share. Statistics show that Netflix, Inc. (NASDAQ:NFLX) has a user base of 247 million, which allows the firm to focus on maintaining users and controlling costs instead of focusing on growth like other streaming subscribers. To ensure that it does not lose subscribers to others that are backed by media giants such as Paramount, Netflix, Inc. (NASDAQ:NFLX) has to provide its users with a steady stream of content that is also catered to local tastes. Its in house production division has produced some of the best known shows in the world such as House of Cards, and key to Netflix, Inc. (NASDAQ:NFLX)’s stock performance is its ability to continually monetize its vast user base either through advertisements or fees.
Ensemble Capital mentioned Netflix, Inc. (NASDAQ:NFLX) in its Q1 2024 investor letter. Here is what the firm said:
“The rapid recovery of Netflix’s subscriber growth has shocked investors who drove the stock down to a price of just $166 in May 2022. While at the time, bearish investors were declaring the company’s growth days were behind it, instead the company added a remarkable 13.1 million new subscribers in the most recent quarter. This was the single largest quarterly subscriber addition other than the large gains experienced during the first quarter of COVID. For all of 2023, the company added nearly 30 million new subscribers, making it the largest annual gain in Netflix history other than the first year of COVID.”
30. Broadcom Inc. (NASDAQ:AVGO)
Consensus ROE: 9%
Number of Hedge Fund Investors in Q2 2024: 130
Broadcom Inc. (NASDAQ:AVGO) is one of the biggest technology companies in the world. The firm designs and sells a variety of semiconductor products such as modems, application specific integrated circuits (ASICs), and network controllers. These position Broadcom Inc. (NASDAQ:AVGO) well to benefit from a growing data center industry that is fueled by AI use. Additionally, the firm also benefits from its ASIC business when it comes to AI since ASICs are important chips for AI use cases. This is because they can be programmed to compute custom workloads, which is key for running custom AI models. Broadcom Inc. (NASDAQ:AVGO) stands to benefit from the shift in the industry to custom AI chips, with media reports indicating that OpenAI has approached it to develop a custom AI chip. The company also adds margin heavy revenue to its business via its cybersecurity division. Broadcom Inc. (NASDAQ:AVGO)’s recent VMWare acquisition enabled it to grow software revenue by 300% in fiscal Q3. Potential tailwinds include customers like Apple moving away from the firm to design custom chips for their products.
Baron Funds mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter. Here is what the firm said:
“Broadcom Inc. is a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions. The stock rose during the quarter as it reported strong earnings on the back of its two key growth drivers, AI semiconductors and its acquired VMware software business. The company once again increased its outlook for AI-related revenue, now expecting $11 billion or more this year (versus prior guidance for $10 billion), on the back of strength in both hyperscale custom compute and networking chips, where Broadcom maintains dominating share. In networking, Broadcom’s solutions are critical to enabling AI training factories to scale towards 100,000 chip clusters in the near term and 1 million chip clusters over the coming years. In AI custom compute, Broadcom designs custom accelerators for large consumer- internet AI companies (such as Google and Meta), who are building increasingly large AI clusters to drive improvements in user engagement and targeted advertising on their consumer media platforms. VMware remains on track to continue rapid sequential growth while simultaneously reducing operating expenses, driving faster-than-expected margin expansion and accretion, as management has simplified the product offering and is converting customers from a license model to subscriptions. We believe VMware will grow beyond the $4 billion near-term quarterly target, well above current analyst expectations. These two factors combined have caused a re-rating to the growth profile for the overall company. To quote CEO Hock Tan, “there is only one Broadcom. Period.”
29. News Corporation (NASDAQ:NWS)
Consensus ROE: 10%
Number of Hedge Fund Investors in Q2 2024: 25
News Corporation (NASDAQ:NWS) is an American media and publication company owned by the billionaire Rupert Murdoch. It distributes some of the most well known financial publications in the world such as The Wall Street Journal, Barron’s, Dow Jones Newswires, and Factiva. Additionally, News Corporation (NASDAQ:NWS) also has a sizeable presence in Australia through an equally well known set of media businesses. Its brand image and scale, as evidenced through cash and equivalents of $1.9 billion and trailing twelve month revenue of $10 billion means that News Corporation (NASDAQ:NWS) is better positioned to manage the shifting trends in the media industry which are driving users towards alternative news sites and forcing publishers to drive growth through subscribers. Additionally, as publisher revenue is driven through advertising, News Corporation (NASDAQ:NWS) tends to do well when business spending isn’t constrained. Consequently, its revenue fell by 5% between fiscal year 2022 and 2023 as global spending slowed due to high rates.
During its fiscal Q4 2024 earnings call, News Corporation (NASDAQ:NWS)’s management shared how a diversified business helps it hedge against falling advertising revenues:
“The progress at Dow Jones continues to apace with revenue growth in the quarter of 4% despite a mixed advertising market. At the heart of that growth is the continued strength of B2B, where revenues climbed 14% of Dow Jones Energy and 12% at Risk & Compliance. In fact, fiscal ’24 was a pivotal moment in the history of the company. As it was the first year in which more than 50% of Dow Jones profitability was driven by the surging B2B segment. Indeed, it is difficult to overstate the impact of B2B growth on Dow Jones and News Corp over the past four years as B2B revenue has expanded at a compound annual rate of 17% and the margin at Dow Jones has broadened from 15% to 24% while segment EBITDA has more than doubled. Crucially, Digital accounted for 80% of fiscal 2024 segment revenue, up from 67% in 2020.
And the core B2B products have renewal rates north of 90%. In that same 4-year span, total subscriptions in the consumer business have burgeoned nearly 55% with digital subs almost doubling. For the fourth quarter, Dow Jones gained 158,000 digital subscribers sequentially and digital advertising expanded 14% year-over-year, more than offsetting the expected declines in print advertising. The quality of Wall Street Journal content continues to be a differentiator as our company signed a valuable multiyear content licensing agreement with the London Stock Exchange Group to provide WSJ news and analysis to its corporate clients, thus building our brand in the European marketplace.”
28. Humana Inc. (NYSE:HUM)
Consensus ROE: 10%
Number of Hedge Fund Investors in Q2 2024: 71
Humana Inc. (NYSE:HUM) is a health insurance and health care provider headquartered in Louisville, Kentucky. The firm works with Medicare and Medicaid, and it also operates pharmacies and care centers. Humana Inc. (NYSE:HUM) relies heavily on Medicare Advantage payments for its revenue, and during H1 2024, 98.6% of its $57.2 billion in revenue came through its premiums business. Within premiums, Medicare accounted for 89% of the total $56 billion in revenue. Consequently, any turbulence that Humana Inc. (NYSE:HUM) faces when it comes to Medicare impacts its shares by quite a bit. This was also the case in October when the stock dropped by 22% after the firm revealed that data showed that 25% of its members were enrolled for four star or better Medicare Advantage plans. Since this reduces the bonus that the firm is paid, investors reacted accordingly especially as the news came after delays to the firm’s ability to increase prices. However, Humana Inc. (NYSE:HUM) stressed that it was working with CMS to see whether there were any discrepancies in the data. Additionally, as the stock has already accounted for the lower ratings, Humana Inc. (NYSE:HUM) could see tailwinds if its outlook improves.
Artisan Value Fund mentioned Humana Inc. (NYSE:HUM) in its Q1 2024 investor letter. Here is what the fund said:
“As the market has been grinding higher and higher, it likely comes as no surprise that value investors like us haven’t been very active in terms of new purchases. In Q1, we added one new name to the portfolio: Humana Inc. (NYSE:HUM). Humana is a leading US managed health care company serving approximately 17 million members in its medical benefit plans, as well as nearly 5 million members in its specialty products. After a few years of benign costs, mainly related to lower utilization trends during COVID in which the managed care industry enjoyed expanding profits and strong growth, utilization has ticked higher, driving up costs. Due to the timing of annual negotiated repricing for Medicare Advantage plans in June, Humana won’t be able to adjust pricing higher until the following year. In the interim, this is problematic for near-term earnings. Naturally, this has weighed on Humana’s stock price. The main drivers for the business remain intact, however, and there are no large fundamental shifts impacting the industry’s long-term outlook. As opportunistic value investors, we took advantage of what we believe is a temporary air pocket in earnings to purchase shares trading at historic lows on most valuation metrics using our estimates of normalized results.”
27. Pfizer Inc. (NYSE:PFE)
Consensus ROE: 12%
Number of Hedge Fund Investors in Q2 2024: 84
Pfizer Inc. (NYSE:PFE) is one of the biggest healthcare and pharmaceutical companies in the world. The firm has a diversified product portfolio as it sells a wide variety of drugs in the market. Additionally, its resources also enable Pfizer Inc. (NYSE:PFE) to concurrently have drugs under development. Consequently, the firm’s hypothesis is dependent on two factors. These are Pfizer Inc. (NYSE:PFE)’s ability to grow market share with its existing product lineup and develop new drugs to keep revenues stable as its patents expire. On the former front, Pfizer Inc. (NYSE:PFE) is facing down the barrel of several expiring patents between 2025 and 2027. These include its breast cancer treatment Ibrance, its anticoagulant drug Eliquis, its pneumococcal medicine Prevnar, and prostate cancer drug Xtandi. Within these, the first two accounted for roughly 20% of Pfizer Inc. (NYSE:PFE)’s sales in 2023. To mitigate the revenue drops, the firm has to develop new drugs. However, Pfizer Inc. (NYSE:PFE)’s pipeline is yet to yield impressive results. Therefore, the firm’s future remains clouded, but on the positive side, activist investor Starboard has acquired a $1 billion stake in the firm so perhaps a turnaround could come soon.
Pfizer Inc. (NYSE:PFE)’s management shared details about its pipeline during the Q2 2024 earnings call:
“This strengthens Lorbrena’s position as an emerging standard of care in the frontline setting. Data from the Phase 3 ECHELON-3 study of Adcetris in combination with lenalidomide and rituximab demonstrated a clinically meaningful improvement in overall survival for patients with relapsed or refractory diffuse large B-cell lymphoma. And, data from Phase 3 study evaluating an additional Adcetris combination regimen showed progression-free data in patients with newly diagnosed classical Hodgkin lymphoma, while significantly reducing side effects compared to a standard of care regimen used in Europe in this setting. We have advanced our oncology clinical pipeline in 2024 with Phase 3 studies for sigvotatug vedotin, our integrin beta 6-directed ADC; atirmociclib, our selective CDK4 inhibitor; Elrexfio in the second-line setting in relapsed/refractory multiple myeloma; and mevrometostat, our EZH2 inhibitor, which we are now moving to Phase 3 and anticipate enrollment beginning in August.
We will continue working toward our 2030 oncology strategy goals of delivering eight or more blockbuster medicines and doubling the number of patients treated with our innovative cancer medicines. We also have momentum with our vaccine programs. In our next-gen PCV candidate, for example, we have advanced to a Phase 2 program in both adults and pediatrics, based on encouraging clinical data that we received that highlight our industry-leading capabilities in expanding valency beyond 20 serotypes. We expect to be highly competitive by offering the largest serotype coverage in a single vaccine while strategically addressing the persistent medical need across invasive disease, antibiotic resistance and challenging serotypes. In RSV with Abrysvo, I am pleased to report that yesterday we received an approval for Abrysvo’s Act-O-Vial presentation in the United States, a presentation which offers advantages such as a never-frozen, unique system enabling one-step reconstitution highly valued by pharmacists.”
26. Aptiv PLC (NYSE:APTV)
Consensus ROE: 13%
Number of Hedge Fund Investors in Q2 2024: 38
Aptiv PLC (NYSE:APTV) is an American origin auto parts manufacturer headquartered in Dublin, Ireland. It focuses on making and selling vehicle electrical systems, safety sensors, and other associated products. Since Aptiv PLC (NYSE:APTV) exclusively targets the car industry, any slowdown in the cyclical sector means that the firm’s stock also struggles. Consequently, the shares are down 21% year to date and have lost 28% over the past twelve months. Aptiv PLC (NYSE:APTV) also suffers from the fact that it markets itself as the only company capable of providing a car’s end to end system. This, coupled with its reliance on the auto industry, led to a massive 13.7% drop in June after one of its biggest customers Volkswagen announced that it was investing $5 billion in electric car company Rivian. This worried investors that Aptiv PLC (NYSE:APTV) was losing its competitive moat which led to the share price drop. These shifts have also led to the narrative around the stock shifting to cost control, with the firm’s midpoint operating income guidance of 11.95% for the full year and EPS guidance of $6.35 playing a key role in sustaining its current share price valuation.
ClearBridge Investments mentioned Aptiv PLC (NYSE:APTV) in its Q3 2024 investor letter. Here is what the fund said:
“Lastly, we sold our position in tier 1 automotive parts supplier Aptiv PLC (NYSE:APTV). Part of our original investment thesis for Aptiv was that the company should garner a premium multiple versus competitors as its product portfolio was well-positioned to take share as auto production shifted toward electric vehicles. However, weak global auto demand and slowing mix shift toward EVs has pressured Aptiv’s business and the company is capturing share at a slower rate than we anticipated. While Aptiv has executed well on profitability and trades at a cheap valuation, we do not foresee the same level of multiple expansion as the company’s growth relative to the market remains weak.”
25. Fidelity National Information Services, Inc. (NYSE:FIS)
Consensus ROE: 14%
Number of Hedge Fund Investors in Q2 2024: 59
Fidelity National Information Services, Inc. (NYSE:FIS) is a financial technology company that provides banks with processing software, online banking solutions, risk management, compliance, and other products. This means that the firm’s fortunes are tied to the banking industry and particularly the spending options that higher margins create for the financial firms. With interest rates dropping, bank costs are expected to drop as well, meaning that Fidelity National Information Services, Inc. (NYSE:FIS) could see its sales increase. Additionally, the firm’s operating model means that it benefits from recurring revenues, which means that it has to land big deals and then earn money through subscriptions. For its H1 2024, $3.4 billion of Fidelity National Information Services, Inc. (NYSE:FIS)’s $4.9 billion in revenue came through transaction processing, which could grow once capital conditions start to lighten up.
Parnassus Investments mentioned Fidelity National Information Services, Inc. (NYSE:FIS) in its Q1 2024 investor letter. Here is what the fund said:
“Fidelity National Information Services, Inc. (NYSE:FIS), a global financial technology company, issued an optimistic outlook for the remainder of 2024, buoying its stock. Improved cost management and completion of the Wordplay spin-off were additional positives.”
24. Citizens Financial Group, Inc. (NYSE:CFG)
Consensus ROE: 14%
Number of Hedge Fund Investors in Q2 2024: 47
Citizens Financial Group, Inc. (NYSE:CFG) is a consumer and commercial banking company based in Rhode Island. The firm also has a private banking division, and its loan portfolio is quite diversified. This diversification is important, especially in the case of an economic downturn during which bank stocks are stressed because of the higher probability of defaults. As of Q2 2024, 20% of Citizens Financial Group, Inc. (NYSE:CFG)’s loan portfolio was accounted for by commercial real estate, which meant that its exposure to the troubled sector that has seen mega defaults in today’s high interest rate era was limited. A key risk factor for the bank is its $1 billion in education loans, which might be troubled if the US government succeeds with the Biden Administration’s loan forgiveness efforts. On the flip side, 21% of Citizens Financial Group, Inc. (NYSE:CFG)’s deposits are non interest paying demand deposits which allow it to stay nimble and keep costs under control as rates are high and others struggle.
Citizens Financial Group, Inc. (NYSE:CFG) is focused on growth through its private banking division. Here’s what management shared during the Q2 2024 earnings call:
“Finally, we’re building a premier private bank, and that is going very well and gaining momentum.
We’re growing our client base and now have about $4 billion of attractive deposits, a $1.6 billion increase from the prior quarter, with roughly 30% non-interest bearing. Also, we are now at $1.4 billion of loans and continuing to grow. We recently opened private banking offices in Mill Valley, California and Palm Beach, Florida, and we are opportunistically adding talent to bolster our banking and wealth capabilities with our Citizens Wealth Management business as the center piece of that effort. We added two exceptional asset management teams in the second quarter, one from San Francisco and the other from Boston, bringing the total private bank AUM to $3.6 billion, well on our way to hit our $10 billion target by the end of 2025. Importantly, our private bank revenue increased 68% to about $30 million in the second quarter, and we are on track to break even on the bottom line later this year.”
23. Coterra Energy Inc. (NYSE:CTRA)
Consensus ROE: 16%
Number of Hedge Fund Investors in Q2 2024: 48
Coterra Energy Inc. (NYSE:CTRA) is an American oil and gas company with operations in the lucrative Permian Basin, Pennsylvania, and Oklahoma. As of the second quarter, the firm had a stellar record of production performance by having beaten guidance in all seven of its consecutive quarters. This comes at a time when the broader US oil industry has struggled due to lower prices driving down production. However, turmoil in the energy industry hasn’t left Coterra Energy Inc. (NYSE:CTRA) unscathed as the firm has struggled in the wake of falling gas prices. These have made it reduce gas production by 275 million cubic feet per day (mcfd) and also delayed plans to expand capacity. Coterra Energy Inc. (NYSE:CTRA)’s income statement has suffered as a result, with the firm missing second quarter EPS estimates of $0.39 by posting $0.37. Additionally, while its operating income jumped by 7.3% in the quarter, expenses also grew by 7.4% to remove some of the impact.
During the Q2 2024 earnings call, Coterra Energy Inc. (NYSE:CTRA)’s management shared its outlook for Q3 and plans to manage the gas turmoil:
“During the third quarter of 2024, we expect total production to average between 620 to 650 MBoepd. Oil to be between 107.0 and 111.0 MBopd, and natural gas to be between 2.5 and 2.63 Bcf per day. Continued strong execution and well performance is expected to drive oil volume growth of approximately 2% quarter-over-quarter. Third quarter gas production will be impacted by our plan to curtail approximately 275 million cubic feet per day net in the Marcellus for August and September due to low expected in-basin pricing.
This will drive a decline in natural gas volumes quarter-over-quarter, but not have a material impact on our cash flow. We will continue to monitor gas fundamentals closely and retain the optionality to respond to market signals on a month-to-month basis.”
22. Corning Incorporated (NYSE:GLW)
Consensus ROE: 17%
Number of Hedge Fund Investors in Q2 2024: 35
Corning Incorporated (NYSE:GLW) is a specialty products company that provides glass, ceramics, and other items for a variety of use cases. Some of the most well known uses of its products include display and camera cover glass for smartphones due to their scratch resistant properties. Corning Incorporated (NYSE:GLW) is one of the most diversified glass companies in the world, and it benefits from having a presence in a myriad of other industries apart from consumer electronics. These include data center communications, sunglasses, aerospace, and emissions control. The growth in data center build outs coupled with the fact that fiberglass is also growing in popularity for use within data centers can prove to be a sizeable catalyst for Corning Incorporated (NYSE:GLW). This can further help the firm’s Optical segment, which accounts for 30% of its revenue, and help management meet the firm’s Springboard Plan. Through this plan, Corning Incorporated (NYSE:GLW) hopes to have an operating margin of 20% by 2026. The only way that a manufacturing company can achieve this is through high volume shipments and price increases, which should drive Corning Incorporated (NYSE:GLW)’s hypothesis moving forward.
O’keefe Stevens Advisory mentioned Corning Incorporated (NYSE:GLW) in its Q2 2024 investor letter. Here is what the fund said:
“Corning Incorporated (NYSE:GLW), another long-time holding, announced Q2 results would come in better than anticipated due to outperformance in their optical connectivity products used for Generative AI. Corning has long been a disappointing investment; with leading-edge technology, it consistently underperforms expectations. Their “springboard” plan, which revolves around $3 billion of excess capacity, seems to be the first sign in a long time that they are ready for a surge in growth. Management has frequently discussed the potential for operating leverage in nearly every conference call, anticipating a return to normal business conditions. Margins should expand over the coming quarters, driving EPS growth. The $3B in incremental sales could be worth in excess of $900m in EBITDA.”
21. Analog Devices, Inc. (NASDAQ:ADI)
Consensus ROE: 17%
Number of Hedge Fund Investors in Q2 2024: 64
Analog Devices, Inc. (NASDAQ:ADI) is a semiconductor company that makes and sells signal processing, power management chips, amplifiers, and other chips. It is heavily reliant on the industrial and automotive industries for its revenue, as 77% of Analog Devices, Inc. (NASDAQ:ADI)’s sales of $6.9 billion during the nine months ending in July came from these two businesses. This, in turn, makes it unsurprising that the shares are up by a modest 19% year to date as both of Analog Devices, Inc. (NASDAQ:ADI)’s primary industries have been under a slowdown stemming from weak industrial output and a glut in the car industry. Looking ahead, since industrial orders typically pick up during the start of the year, the rest of 2024 might prove to be another slow period for Analog Devices, Inc. (NASDAQ:ADI) despite the fact that the firm’s second quarter sales of $2.3 billion beat the midpoint of analyst estimates of $2.27. On the flip side, should economic growth continue to remain robust and lower interest rates facilitate greater industrial activity, then Analog Devices, Inc. (NASDAQ:ADI) could see a release of pent up demand for its products.
Carillon Tower Advisors mentioned Analog Devices, Inc. (NASDAQ:ADI) in its Q2 2024 investor letter. Here is what the fund said:
“Analog Devices, Inc. (NASDAQ:ADI) rebounded as management teams at several semiconductor companies in the analog space called the bottom, seeing improved conditions ahead. The analog semiconductor industry is a very cyclical business that has underperformed the broader semiconductor industry for several years.”
20. Merck & Co., Inc. (NYSE:MRK)
Consensus ROE: 18%
Number of Hedge Fund Investors in Q2 2024: 96
Merck & Co., Inc. (NYSE:MRK) is a global pharmaceutical and healthcare giant. It is one of the largest companies in the world and has considerable financial resources as evidenced by $7 billion in cash and $10 billion in receivables. Like every other pharma company, Merck & Co., Inc. (NYSE:MRK)’s hypothesis depends on its ability to grow and scale existing drugs and simultaneously maintain a robust pipeline of new drugs to ensure revenue doesn’t drop when patents for existing products expire. On the former front, 45% of Merck & Co., Inc. (NYSE:MRK)’s Q2 sales were driven by its blockbuster cancer drug KEYTRUDA which raked in $7.3 billion in sales. This marked a 21% annual growth, and after KEYTRUDA, another high performing drug is Merck & Co., Inc. (NYSE:MRK)’s GARDASIL HPV vaccine. KEYTRUDA’s patents are set to expire in 2028, and keeping an eye on the future, Merck & Co., Inc. (NYSE:MRK) recently acquired an antibody for cancer and immune system diseases for $750 million. It is also developing a treatment for non small cell lung cancer (NCLSC), a treatment for thrombocythemia, and a treatment for diabetic macular edema. However, Merck & Co., Inc. (NYSE:MRK) could see some headwinds if future drug negotiations with the US government lead to lower payouts.
Baron Funds mentioned Merck & Co., Inc. (NYSE:MRK) in its Q1 2024 investor letter. Here is what the fund said:
“Global pharmaceutical company Merck & Co., Inc. contributed on the continued growth of Keytruda, the company’s key asset and the leading immuno-oncology agent used to treat a variety of cancers. The FDA’s late March approval of pulmonary arterial hypertension drug sotatercept, also drove share gains. We retain conviction as Merck has started to transition from prioritizing its Keytruda franchise to building a more diversified business, with a focus on the Gardasil vaccine, pneumococcal vaccine development, and cardiovascular drug development, well in advance of the scheduled expiration of patent protection/exclusivity rights.”
19. Blackstone Inc. (NYSE:BX)
Consensus ROE: 19%
Number of Hedge Fund Investors in Q2 2024: 58
Blackstone Inc. (NYSE:BX) is one of the biggest asset management companies in the world. It provides a wide variety of products and services such as debt investment, buyouts, and minority investments. As of June 2024, Blackstone Inc. (NYSE:BX) had $40 billion in total assets, making it one of the biggest firms of its kind. Looking at the shares, its stock is up by just 16% year to date since private markets and debt activity remain muted as long as interest rates are high. This is also reflected in Blackstone Inc. (NYSE:BX)’s financials, as the firm expects that its third quarter realizations will be $300 million which is a historically low figure. However, pent up demand for private equity and capital markets activity could help Blackstone Inc. (NYSE:BX) moving forward. Its forward P/E ratio is currently 25, which is higher than the peer value of 20, which implies that perhaps some of this optimism is already factored into the shares.
Blackstone Inc. (NYSE:BX)’s management shared its plans to become the global leader in AI investments during the Q2 2024 earnings call:
“Current expectations are that there will be approximately $1 trillion of capital expenditures in the United States over the next five years to build and facilitate new data centers, with another $1 trillion of capital expenditures outside the United States. The need to provide power for these data centers is a major contributor to an expected 40% increase in electricity demand in the United States over the next decade compared to minimal growth in the last decade. We believe these explosive trends will lead to unprecedented investment opportunities for our firm. Blackstone is positioning itself to be the largest financial investor in AI infrastructure in the world as a result of our platform, capital and expertise. Our portfolio today consists of $55 billion of data centers, including facilities under construction, along with over $70 billion in prospective pipeline development.
Our largest data center portfolio company, QTS, has grown lease capacity 7x since we took it private in 2021. Through QTS and our other holdings, we have a robust ongoing dialogue with the world’s largest data center customers. We’re also providing equity and debt capital to other AI-related companies. For example, in the second quarter, we committed to provide AI-focused cloud service provider, CoreWeave, with $4.5 billion of a $7.5 billion financing package, the largest debt financing in our history, and we’re now focusing on addressing the sector’s power needs in many differentiated ways. With large-scale platforms in infrastructure, real-estate, private credit and renewable energy, we are extremely well positioned to be the partner of choice in this rapidly growing area.”
18. KKR & Co. Inc. (NYSE:KKR)
Consensus ROE: 19%
Number of Hedge Fund Investors in Q2 2024: 75
KKR & Co. Inc. (NYSE:KKR) is a global private equity company that conducts all sorts of financial operations such as buyouts, acquisitions, distressed investments, and turnarounds. It is one of the biggest firms of its kind, with total assets that sit at a whopping $317 billion. Despite a slowdown in the global private equity markets, which led to smaller peer Blackstone guiding lower realization income for Q3, KKR & Co. Inc. (NYSE:KKR)’s was a robust set of results. For Q2, the firm grew its monetization income by $35 million over the guided figures of $500. However, the figure missed analyst estimates of $660 million. The firm’s scale is playing to its advantage in today’s tight credit environment, with KKR & Co. Inc. (NYSE:KKR) managing to raise $4.6 billion for its North America mid market fund in September. The firm is also busy expanding its operating footprint, and it acquired $377 million of logistics properties earlier this year which could help it in a growing economy.
Alphyn Capital Management mentioned KKR & Co. Inc. (NYSE:KKR) in its Q3 2024 investor letter. Here is what the fund said:
“KKR continues to deliver strong performance this year. The company has reported an uptick in capital markets activity, which had previously slowed, leading to increased fees from transactions and the potential for more realizations and carried interest as M&A activity resumes.
Additionally, KKR has entered a new fundraising cycle, recently securing a $10 billion first close on its Infrastructure V fund. In recent years, KKR has strategically emphasized infrastructure, credit, and real estate, with its core flagship strategies representing only 6% of total AUM fundraising. Now, the company is refocusing efforts on raising capital for its flagship North American and Asian buyout funds, positioning itself for continued growth in earnings and carried interest moving forward.”
17. KeyCorp (NYSE:KEY)
Consensus ROE: 22%
Number of Hedge Fund Investors in Q2 2024: 38
KeyCorp (NYSE:KEY) is a Ohio based regional bank that primarily finances industrial firms and businesses. As of Q2 2024, $53 billion of the bank’s $107 billion in loans were made to businesses and industrial firms. KeyCorp (NYSE:KEY) is also relatively well insulated from troubles in the commercial real estate industry, as $17 billion of its loans are to the sector which has come under increased scrutiny because of high profile defaults in today’s high interest rate era. Its exposure to businesses and industrial firms also positions KeyCorp (NYSE:KEY) well to capitalize on growth in economic activity. It also protects the firm against losses since these businesses typically have a robust asset base which can be liquidated to cover the loan in case of a default. KeyCorp (NYSE:KEY) is also focusing on streamlining its balance sheet and raising funds by selling its 15% stake to Scotiabank.
KeyCorp (NYSE:KEY)’s management has also been keeping a tight control on its capital ratios. Here’s what management shared during the Q2 2024 earnings call:
“This quarter, our Common Equity Tier 1 ratio improved by roughly another 20 basis points to 10.5%. Our marked CET1 intangible capital ratios also improved. As reported a few weeks ago, we have received the results of the Fed’s stress test or D-Fest, which implied a preliminary stress capital buffer for Key of 3.1%, which is up 50 basis points from the SCV we received in 2022. I’ll make just a few comments. First, even under this preliminary buffer, we have plenty of excess capital. Our 10.5% CET1 ratio compares to what would be a new 7.6% implied minimum. So the results continue to illustrate our strong capital position. Secondly, we, like others in our industry, don’t have insight into the Fed’s models. The Fed’s modeled loan losses for Key, particularly for our commercial real estate and first-lien mortgage portfolios, are inconsistent with our internally run stress tests.”
16. Citigroup Inc. (NYSE:C)
Consensus ROE: 22%
Number of Hedge Fund Investors in Q2 2024: 85
Citigroup Inc. (NYSE:C) is a New York based mega bank with total assets of $2.4 trillion. This makes it one of the few important banks called GSIB by the US, and allows investors to have comfort in the fact that the government might help it in case of a failure. Citigroup Inc. (NYSE:C) also benefits from a diversified business model which is less exposed to lower revenues from dropping interest rates or higher costs of depositor payout. This is because as of Q2, $4.6 billion of Citigroup Inc. (NYSE:C) $19.4 billion in revenue came from its Services business. This business is involved in payments, receivables processing, and cash management for businesses and is margin heavy as well as it accounted for $1.2 billion of Citigroup Inc. (NYSE:C)’s $2.9 billion in Q2 net income. The bank’s turnaround efforts led to an 11% pre provision earnings jump to $6.6 billion in Q2, but the risk of further action from regulators against purported improprieties or its size can introduce headwinds.
During the Q2 2024 earnings call, Citigroup Inc. (NYSE:C)’s management commented on its restructuring efforts:
“Our transformation is addressing decades of underinvestment in large parts of Citi’s infrastructure and in our risk and control environment. And when you unpack that, those areas where we had an absence of enforced enterprise-wide standards and governance, we’ve had a siloed organization that’s prevented scale, a culture where a lot of groups are allowed to solve problems — the same problem in different ways, fragmented tech platforms, manual processes and controls and a weak first-line of defense, too few subject matter experts. So, this is a massive body of work that goes well beyond the consent order. And this is not old Citi putting in band-aid.
This is Citi tackling the root issues head-on. It’s a multi-year undertaking as we’ve talked about and you saw the statement by one of our regulators this week, we have made meaningful progress on our transformation — excuse me, and on our simplification.”
15. Dominion Energy, Inc. (NYSE:D)
Consensus ROE: 23%
Number of Hedge Fund Investors in Q2 2024: 27
Dominion Energy, Inc. (NYSE:D) is a diversified electrical utility that caters to the needs of commercial and industrial customers. During H1 2024, 38% of the firm’s revenue came from commercial customers while 32% were from commercial customers. These figures do not include the revenues of Virginia Power. Dominion Energy, Inc. (NYSE:D) has seen mixed performance this year particularly as colder weather led to dropping demand for electricity. This led to its EPS being shaved by $0.06 during the first quarter, and moving forward, the reversal of this trend could help the company. Dominion Energy, Inc. (NYSE:D) is also expanding its power generation to include an offshore wind project which is one of the largest of its kind in the world and aims to use a whopping 176 turbines to generate electricity. The firm aims to complete the project by 2026, and after initial issues have been taken care of, any slips on this could spell headwinds.
Dominion Energy, Inc. (NYSE:D)’s management commented on the wind project during the Q2 2024 earnings call. Here is what they said:
“On July 24, the joint proposed order was filed with the commission representing the final procedural step. We expect a final commission order during the third quarter with closing to follow shortly thereafter. And as it relates to CVOW, we received Affiliates Act approval, representing the first of two required Virginia approvals from the State Corporation Commission on June 26. Last week, SEC staff filed their comments on the Transfer’s Act and financing partner petition, the second of two required Virginia approvals. No other parties filed comments, and we consider the staff comments to be constructive. A hearing is scheduled for August 27, and we expect the final order later this year. In North Carolina, the financing requires affiliates agreement approval.
This week, the NCUC public staff were the only party to file comments and we consider their comments to be constructive. Next steps will be commissioned hearings, if requested, followed by a commission order. We continue to expect the CVOW financing partnership to be completed by the end of the year, and we look forward to continuing to work with all parties involved. Turning to financing on Slide 6. Since our last call, we successfully issued $2 billion in enhanced junior subordinated notes. These tax deductible securities received 50% equity credit from the credit rating agencies. We’ve also issued approximately $400 million of equity under our ATM program, representing 80% of the midpoint of our annual guidance as well as roughly $100 million under our DRIP programs.”
14. Targa Resources Corp. (NYSE:TRGP)
Consensus ROE: 24%
Number of Hedge Fund Investors in Q2 2024: 39
Targa Resources Corp. (NYSE:TRGP) is a Texas based natural gas infrastructure company. On the surface, this would imply that the firm has struggled this year as dropping natural gas prices have led to lower gas output and consequently lower demand for natural gas and associated infrastructure. However, in reality, Targa Resources Corp. (NYSE:TRGP)’s shares are up a cool 88% year to date which suggests that something else is brewing under the hood. We don’t have to look too far to find out what this is, as the firm has benefited from its presence in America’s hottest oil producing region, the Permian Basin. Targa Resources Corp. (NYSE:TRGP)’s presence in the Permian has allowed it to benefit from a growth in gas production there. Permian accounted for 5.8% of America’s gas production in 2011, and in 2022, its share jumped to 18.6%. Targa Resources Corp. (NYSE:TRGP) also benefits from the fact that it operates in the gas marketing business. This enables it to avoid supply chain bullwhips to an extent and gauge the demand for gas early on to ensure it does not over or under invest in capacity.
Since Permian is quite important to Targa Resources Corp. (NYSE:TRGP)’s operations, here’s what management had to say about it during the Q2 2024 earnings call:
“Activity in the Permian remains very strong, supporting our view of continued long-term growth from the basin. Our Permian volumes during the second quarter increased about 275 million cubic feet per day over the first quarter, which is a full plant. And year-over-year, our volumes in the Permian are up more than 600 million cubic feet per day. And currently, our volumes in the Permian are up another 200 million cubic feet per day compared to the second quarter. We expected strong growth from our Permian assets, but the growth we have seen this year has exceeded our expectations.
We now expect low double-digit percentage volume growth this year, which sets us up well for meaningful growth in 2025 and beyond. This higher growth rate is driving incremental EBITDA and requiring additional growth capital investment. These volumes are core to our business, and we benefit across the integrated NGL value chain, driving higher margins into our downstream business and generating strong ROIC. Given higher-than-anticipated Permian volumes and an outlook for continued strong activity across our Midland and Delaware footprint, we announced our next two plants in the Permian, one in the Midland Basin and another in the Delaware Basin. Some spending for these plans was included in the forecast we provided back in February, but the timing and cadence of spending has accelerated.”
13. The Estée Lauder Companies Inc. (NYSE:EL)
Consensus ROE: 24%
Number of Hedge Fund Investors in Q2 2024: 47
The Estée Lauder Companies Inc. (NYSE:EL) is one of the most well known consumer beauty products companies in the world. Since it is a prestige beauty brand company, naturally, the shares do not perform well when inflation is high. This has been the case recently, as The Estée Lauder Companies Inc. (NYSE:EL)’s shares have lost 34.7% and 32.51% year to date and over the past twelve months, respectively. A large portion of this underperformance has been because of the firm’s woes in China where economic troubles have been more severe and longstanding compared to the West. During its fiscal year 2024, The Estée Lauder Companies Inc. (NYSE:EL)’s Asia/Pacific sales dropped by 6% annually, and the firm attributed the drop primarily to China. Asia/Pacific accounted for 31% of the firm’s sales in FY24, making the drops hard hitting on its impact statement. Travel retail is another troubled segment for The Estée Lauder Companies Inc. (NYSE:EL), and a drop in Asia sales further impacted earnings.
With the overall sentiment remaining dour, here’s what The Estée Lauder Companies Inc. (NYSE:EL) shared for its FY25 outlook during the Q4 FY24 earnings call:
“Looking ahead, our fiscal year 2025 outlook reflects continued declines in the prestige beauty industry in China and Asia travel retail. While the PRGP, which remains on track relatively to our previously stated goals, enable us to offset the pressure to profitability from declines in areas of our business that have high penetration of skin care, it yields a slower pace of operating margin expansions for fiscal year 2025 than we had previously expected when we expanded the PRGP in February.
For fiscal year 2025, in the rest of our global business, we are planning to deliver improved performance across both developed and emerging markets. To fuel this, our strategic priorities are reigniting skin care, capitalizing on the multiple growth drivers of high-end fragrance, moving faster in leveraging winning channels, launching accretive innovation inclusive of new, big opportunities and enhancing our precision marketing capabilities for increased effectiveness and efficiency of our consumer facing investments. The PRGP enables and accelerates these strategy priorities and is the foundation to restore sustainable long-term organic sales growth and to rebuild our operating profitability. We are also creating a faster and leaner organization that will more quickly adapt to market dynamics and be better able to leverage future growth.
While our sales and profit outlook for fiscal year 2025 is disappointing, this year we will make important strides as we implement our strategy reset to continue rebalancing regional growth, deliver improved annual profitability, strengthen go-to-market and innovation capabilities to elevate our execution in response to a more competitive market. These efforts will position us to both outperform the prestige beauty industry in fiscal year 2026 and accelerate profitability expansion.”
12. T-Mobile US, Inc. (NASDAQ:TMUS)
Consensus ROE: 24%
Number of Hedge Fund Investors in Q2 2024: 64
T-Mobile US, Inc. (NASDAQ:TMUS) is among the big three telecommunications carriers in America. As is with other carriers, the firm’s hypothesis depends on its ability to retain and grow subscribers, revenue per subscriber, and presence in the fast growing fixed wireless market. T-Mobile US, Inc. (NASDAQ:TMUS) also benefits from the fact that since communications services are essential products, its revenue is somewhat hedged against economic downturns. The firm has also been making big moves lately, and it is the first major American carrier to partner up with SpaceX to provide satellite based text messaging for customers. SpaceX is launching special satellites for this service, and T-Mobile US, Inc. (NASDAQ:TMUS) customers were able to rely on it to send messages during Hurricanes Helene and Milton that wreaked havoc in the US in October. The firm also has the highest free cash flow margin in the industry, as its free cash flow grew by 54% during Q2. During the quarter, the firm also had 5.6 million fixed wireless broadband customers.
T-Mobile US, Inc. (NASDAQ:TMUS) is also aggressively targeting the fiber market. Here’s what management share during the Q2 2024 earnings call:
“First of all, we’re just really excited about where we are. This was a terrific transaction for us to be able to partner with KKR to acquire Metronet on top of our previous transaction to partner to acquire Lumos. So, now we have the beginnings of a critical mass in the space. For me, this is big. I mean, these two transactions taken together with our partnerships in the wholesale arena are going to allow us to reach millions of homes. The Lumos transaction, we see 3.5 million homes passed by 2028. The Metronet transaction, we see 6.5 million homes passed by 2030. There’s probably a couple more million in the wholesale partnerships we have so far.
So, that’s a pretty significant footprint that we put together. More importantly, we’ve chosen the best assets in the space. We’re very excited about this. Now, to the premise of your question, I think what people can see from our strategy are a number of things. One, our bias is pure play fiber, the simplicity and elegance of that model. It’s doing it with partners so that we can get more leverage on our equity dollars. It’s about best in class assets that are performing and growing like we’re seeing. We have some further appetite, but not much. I want to make that clear. I mean, these transactions that we have done get us millions of homes past and do it in a way that we think is really smart and positive for our shareholders. So, while we’re open-minded to things that fit this strategy, it would have to be the right deal.”
11. Tyson Foods, Inc. (NYSE:TSN)
Consensus ROE: 25%
Number of Hedge Fund Investors in Q2 2024: 27
Tyson Foods, Inc. (NYSE:TSN) is one of the biggest food companies in the world. The firm primarily sells meat products, ranging from nuggets to patties, hot dogs, bacon, and steaks. As Tyson Foods, Inc. (NYSE:TSN) sells all kinds of meat, specifically fish, chicken, beef, and pork, its business is somewhat diversified despite a pure play focus on meat based foods. This is important since if one kind of meat faces industry or market troubles, the firm can try to make up through sales of other meats. In fact, 2024 has seen beef prices soar with the monthly average for all fresh beef retail value sitting at $8.15 per pound in July 2024 for more than a two decade high. This has come on the back of dropping cattle inventory as farmers sought to keep more cattle for slaughter instead of reserving them for breeding. On the flip side, chicken prices have fallen on the back of improved supply. Subsequently, Tyson Foods, Inc. (NYSE:TSN) is stressed with low margins on both sides, as high cattle prices drive up costs while low chicken prices constrain its ability to maintain margins with low volume. However, the firm is taking an active approach and has improved its chicken hatch ability and mortality by 3.6% and 0.5%, respectively.
Tyson Foods, Inc. (NYSE:TSN)’s management commented on its proactive actions during the Q2 2024 earnings call:
“As I mentioned, chicken had one of its best quarters in some time, but we are clearly benefiting from better market conditions including lower grain costs, our actions and focus on the fundamentals across all aspects of the value chain are also contributing to these strong results. Our live operations continue to improve with hatch rate and livability up year-over-year.
We generate efficiencies and improve utilization in our plants by optimizing our network. Our demand planning and customer service have also taken significant steps forward as we improve order bill rates and continued to build long-term partnerships with customers all the while reducing inventory. We’ve reinvested some of the proceeds from these improvements into the long-term growth of our value added chicken business. For instance, we’ve accelerated the ramp up of our Danville Fully Cooked facility and launched new products like honey bites and restaurant quality wings. In summary, our focus on the basics has built a fundamentally stronger chicken business with an eye on the future.”
10. First Solar, Inc. (NASDAQ:FSLR)
Consensus ROE: 26%
Number of Hedge Fund Investors in Q2 2024: 66
First Solar, Inc. (NASDAQ:FSLR) is a solar power products firm that primarily caters to the needs of businesses and industrial users. As clean energy stocks have struggled during today’s era of high interest rates which make financing costly projects expensive, one would expect that First Solar, Inc. (NASDAQ:FSLR) would have fared similarly. However, the firm’s shares are up 19% year to date which can be attributed primarily to the Biden Administration’s decision to increase tariffs on Chinese origin solar panels to 50% from 25%. These fare well for First Solar, Inc. (NASDAQ:FSLR) as the pressure on it to reduce prices to compete with cheap Chinese products drops. Yet, despite these tailwinds, clean energy stocks are among the most volatile on the market. This is also the case for First Solar, Inc. (NASDAQ:FSLR), as its shares tanked by 9% in October after Jefferies cut the share price target to $266 from $271 as it cautioned that the firm’s upcoming third quarter results could be disappointing on the back of lower volumes.
First Solar, Inc. (NASDAQ:FSLR) is also aggressively targeting the budding demand for AI power. Here’s what management shared during its Q1 2024 earnings call:
“So I don’t know if I have a good number for you. I would say, if you look at the companies that we talked about on the call, the ones that we’re going to be adding today in demand significantly, Apple Google, Microsoft, Meta, they value certainty even more than the utility. So if you think about utility potentially contract multiple projects, and they can deal with a level of failure or delay in a way that you guys can’t if they have commitment to renewable targets at certain times. So they value certainty, and they certainly value the reliability of where the product is coming from and the concerns around slave labor. So we tend to be the first port of call for many of these companies or the developers who are doing the work for them.
And so in many cases, developers will come to us saying that they have had discussions with these people and that they’ve a preference to buy or work with the solar products, especially for U.S.-based demand. So, I don’t think I have a percentage I can give you, but I would say that generally, we’re going to be the favored supplier to the project that are going to be supplying power to these data centers or these kind of asset owners.”
9. The Allstate Corporation (NYSE:ALL)
Consensus ROE: 30%
Number of Hedge Fund Investors in Q2 2024: 61
The Allstate Corporation (NYSE:ALL) is one of the biggest auto and homeowner insurance companies in America. This lends it a sizeable asset base of a whopping $103 billion, which is key in today’s rapidly evolving insurance market on the back of climate change. The Allstate Corporation (NYSE:ALL)’s presence in the auto and homeowner insurance market also means that the firm can grow either division by cross selling products. Yet, The Allstate Corporation (NYSE:ALL)’s homeowner insurance business carries risks as well, since hurricanes and other climate catastrophes have driven several homeowner insurance providers out of markets such as Florida. This was also the case in October as The Allstate Corporation (NYSE:ALL)’s shares dropped by 6% within an hour of trading as Hurricane Milton was categorized as a Category 4 storm. Yet, the climate has also helped the firm, as milder weather along with other factors has pushed the stock 29% higher year to date. Cost control should drive the hypothesis in the near term, as after sizeable premium increases, The Allstate Corporation (NYSE:ALL) can grow earnings by reducing costs.
Ariel Investments mentioned The Allstate Corporation (NYSE:ALL) in its Q2 2024 investor letter. Here is what the fund said:
“We added property and casualty insurer, Allstate Corporation. A challenging macro-environment, inflation and lower reserve development led to significant underwriting losses across key markets, presenting us with an attractive entry point. Looking ahead, we expect the strong pricing environment, coupled with lower inflationary pressure and future premium growth to yield upside for shares. Additionally, management is committed to improving its adjusted expense ratio and recently made upgrades to its claims handling processes to minimize loss development and lower claim severities.”
8. Gilead Sciences, Inc. (NASDAQ:GILD)
Consensus ROE: 31%
Number of Hedge Fund Investors in Q2 2024: 62
Gilead Sciences, Inc. (NASDAQ:GILD) is a sizeable drug company. It sells a variety of drugs such as those for AIDS, hepatitis, high blood pressure, and fungal infections. Gilead Sciences, Inc. (NASDAQ:GILD)’s sizeable financial resources, as evidenced by a cash pile of $3.7 billion have also allowed it to become one of the leading players in the high growth global market for HIV. The firm’s Biktarvy HIV treatment generated $3.2 billion in Q2 sales for an 8% growth. This enabled it to make a sizeable contribution to Gilead Sciences, Inc. (NASDAQ:GILD)’s HIV portfolio which generated $4.75 billion in sales during the quarter. Along with Descovy, another HIV drug that generated $485 million in revenue, Biktarvy accounted for 53.6% of Gilead Sciences, Inc. (NASDAQ:GILD)’s $6.9 billion revenue in Q2. The firm is also developing treatments for HIV, cholangitis, lung cancer, and gastrointestinal cancer called lenacapavir, seladelpar, trodelvy, domvanalimab, respectively. Their performance in trials, along with loss or gain of HIV market share are key drives of Gilead Sciences, Inc. (NASDAQ:GILD)’s hypothesis.
Parnassus Investments mentioned Gilead Sciences, Inc. (NASDAQ:GILD) in its Q1 2024 investor letter. Here is what the fund said:
“Gilead Sciences, a global biopharmaceutical company, saw its shares decline as a cancer drug failed to expand into additional lung indications, denting investor faith in the company’s oncology franchise. We maintain confidence in Gilead’s core HIV franchise and ability to expand into cancer treatment portfolios.”
7. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Consensus ROE: 42%
Number of Hedge Fund Investors in Q2 2024: 108
Advanced Micro Devices, Inc. (NASDAQ:AMD) is a semiconductor designer. The firm sells x86 based CPUs, GPUs, and custom chips. It has one of the most unique positions for any company in the world. In the CPU market, Advanced Micro Devices, Inc. (NASDAQ:AMD) competes with the larger rival Intel, while in the GPU market, it competes with Wall Street’s AI darling NVIDIA. Consequently, it is the only company within the trio with an established position in both markets. Like NVIDIA, Advanced Micro Devices, Inc. (NASDAQ:AMD)’s narrative in 2024 has focused on AI. Its ability to perform well depends on how well it can capture the AI accelerator market from NVIDIA and whether the AI products lead to bottom line profits. Additionally, Advanced Micro Devices, Inc. (NASDAQ:AMD) has also continued to gain CPU market share over Intel due to the latter’s struggles with manufacturing. With NVIDIA’s chips pricey and in short supply, the firm could see tailwinds from capturing sizeable AI accelerator orders from the likes of Tesla and Microsoft.
Advanced Micro Devices, Inc. (NASDAQ:AMD)’s data center division has been its fastest growing segment for several quarters. Here’s what management shared during the Q2 2024 investor call. Here is what they said:
“Turning to the segments, data center segment revenue increased 115% year-over-year to a record $2.8 billion, driven by the steep ramp of Instinct MI300 GPU shipments and a strong double-digit percentage increase in EPYC CPU sales. Cloud adoption remains strong as hyperscalers deploy fourth-gen EPYC CPUs to power more of their internal workloads and public instances. We are seeing hyperscalers select EPYC processors to power a larger portion of their applications and workloads, displacing incumbent offerings across their infrastructure with AMD solutions that offer clear performance and efficiency advantages.
The number of AMD-powered cloud instances available from the largest providers has increased 34% from a year ago to more than 900. We are seeing strong pull for these instances with both enterprise and cloud-first businesses. As an example, Netflix and Uber both recently selected fourth-gen EPYC Public Cloud instances as one of the key solutions to power their mission critical customer facing workloads. In the enterprise, sales were increased by a strong double-digit percentage sequentially. We closed multiple large wins in the quarter with financial services, technology, health care, retail, manufacturing, and transportation customers, including Adobe, Boeing, Industrial Light & Magic, Optiver, and Siemens. Importantly, more than one-third of our enterprise server wins in the first half of the year were with businesses deploying EPYC in their data centers for the first time, highlighting our success attracting new customers, while also continuing to expand our footprint with existing customers.”
6. GE Aerospace (NYSE:GE)
Consensus ROE: 45%
Number of Hedge Fund Investors in Q2 2024: 86
GE Aerospace (NYSE:GE) is the freshly formed aerospace successor of the General Electric company. As the name suggests, the firm is a defense and aerospace contractor and sells products such as aircraft engines and systems. Consequently, GE Aerospace (NYSE:GE)’s hypothesis is split between the performance of the aviation industry and the defense sector. On the former front, aviation continues to. be in turmoil as production troubles at Boeing have reduced the demand for new engines and grown demand for refurbished ones. The latter front is thriving, as conflicts in Eastern Europe and the Middle East coupled with tensions in the South China Sea ensure defense contractors receive a steady flow of funds to develop the latest weapons and associated products. Fortunately for GE Aerospace (NYSE:GE), refurbishment and after sales service are high margin businesses that contribute more to the bottom line compared to the top line.
During the Q2 2024 earnings call, GE Aerospace (NYSE:GE)’s management commented on the trends that it’s observing in the spare parts market:
“No, no, you’re right. I mean, we had a good second quarter on orders. We had a good first half. I mean services orders were kind of, as you said, mid-30s for the second quarter, up 30% or so for the first half. Strong book-to-bill here in the first half of the year on top of a good book-to-bill we saw in 2023. So the momentum is definitely there on the services side. And as you look at the back half of the year, we are expecting the services growth to be a little bit higher in the second half than in the first half, right, both the shop visits and on spare parts on a year-over-year basis. So we delivered 9% internal shop visit growth in the first half of the year. And if you look at our low to mid-teens guidance on shop visits, that would imply that shop visits will be closer to high teens in the second half of the year on a year-over-year basis.
So that’s what we are projecting. But overall, it’s mid-teens services growth, and that is consistent with what we think the future years will look like. I think that we had – when we look at our 2025 outlook, we were projecting continuous strong services growth. So it’s good to see the strong orders growth, good to see, as Larry said earlier, LEAP gaining share on the overall air traffic departure side as well.”
5. Uber Technologies, Inc. (NYSE:UBER)
Consensus ROE: 45%
Number of Hedge Fund Investors in Q2 2024: 145
Uber Technologies, Inc. (NYSE:UBER) is the largest ride sharing services provider in the US. The firm has leveraged its online platform to provide additional services as well such as food delivery. In fact, along with being the largest ride sharing company, the firm is also the second biggest food delivery company in the US after DoorDash. As a result, Uber Technologies, Inc. (NYSE:UBER) benefits from earning from multiple businesses. These also enable the firm to target high growth initiatives such as air taxis, autonomous ride sharing vehicles, and dedicated shuttles. Starting from air taxis, Uber Technologies, Inc. (NYSE:UBER) has invested $125 million into Joby Aviation as of 2020. For autonomous vehicles and shuttles, the firm has teamed up with General Motors to create a robotaxi service, and in October, the firm started a pilot program in New York to ferry users between Midtown New York and LaGuardia Airport. Uber Technologies, Inc. (NYSE:UBER)’s existing market position means that it remains the preferred partner for autonomous vehicles, which could work in its favor down the road.
RiverPark Advisors mentioned Uber Technologies, Inc. (NYSE:UBER) in its Q1 2024 investor letter. Here is what the fund said:
“UBER remains the undisputed global leader in ride sharing, with a greater than 50% share in every major region in which it operates. The company is also a leader in food delivery, where it is number one or two in the more than 25 countries in which it operates. Moreover, after a history of losses, the company is now profitable, delivering expanding margins and substantial free cash flow. We view UBER as more than a ride sharing and food delivery service; we also see it as a global mobility platform with 142 million users (by comparison, Amazon Prime has 200 million members) and the ability to penetrate new markets of on-demand services, such as package and grocery delivery, travel, and hourly worker staffing. Given its $5.4 billion of unrestricted cash and $4.8 billion of investments, the company today has an enterprise value of $165 billion, indicating that UBER trades at 21x our estimates of next year’s free cash flow.”
4. International Paper Company (NYSE:IP)
Consensus ROE: 46%
Number of Hedge Fund Investors in Q2 2024: 44
International Paper Company (NYSE:IP) is one of the biggest cardboard and pulp manufacturing companies in America. This makes the stock dependent on the economic environment, with increased activity translating into a great demand for its products. Consequently, the slow industrial environment in America stemming from high interest rates has also made an impact on International Paper Company (NYSE:IP)’s income statement. Between 2022 and 2023, the firm’s revenue dropped by 11%, and to reverse the trend, the firm is currently embarking on a strategy that prioritizes value over volume. If this strategy is successful, then International Paper Company (NYSE:IP) could end up bolstering its margins and improve bottom line earnings. The stock is up by 30% year to date, primarily on the back of a now ended acquisition bid for the company by a Brazilian firm. Additionally, with the containerboard market now improving, International Paper Company (NYSE:IP) could see higher prices for these products and add to its top line.
Diamon Hill Capital mentioned International Paper Company (NYSE:IP) in its Q2 2024 investor letter. Here is what the fund said:
“Other top individual contributors in the quarter included Coherent and new holding International Paper Company (NYSE:IP). International Paper is one of the US’s largest manufacturers of containerboards, which is used to make corrugated boxes and other packaging materials. We expect that as the demand environment improves and the company focuses on its commercial execution, it will be able to improve profitability and bring operating margins back to normalized levels. Given what we view as an attractive valuation for a high-quality company, we capitalized on the opportunity to initiate a position in Q2. Shares subsequently rallied after reports that Brazilian company Suzano is interested in acquiring the company.”
3. Alexandria Real Estate Equities, Inc. (NYSE:ARE)
Consensus ROE: 47%
Number of Hedge Fund Investors in Q2 2024: 36
Alexandria Real Estate Equities, Inc. (NYSE:ARE) is a specialty real estate investment trust that owns and operates office and laboratory properties primarily used by the life sciences industry. Consequently, the firm’s shares are down 9.5% year to date as the life sciences industry typically thrives when rates are low and plenty of funds are available for research and development activities. Since funding is constrained, fewer life sciences companies are renting out office and laboratory spaces which has led to an oversupply in the market and depressed the rates that Alexandria Real Estate Equities, Inc. (NYSE:ARE) can charge for its properties. However, even though these trends have affected its performance, the REIT enjoys several advantages within its sector. For instance, most of Alexandria Real Estate Equities, Inc. (NYSE:ARE)’s properties are in life sciences hubs and major cities such as Boston, Seattle, San Francisco, and San Diego. This means that the firm enjoys proximity to research clusters. Additionally, a large portion of its largest tenants are also large cap companies. Subsequently, once the life sciences sector improves, Alexandria Real Estate Equities, Inc. (NYSE:ARE) could see sizeable tailwinds.
ClearBridge Investments mentioned Alexandria Real Estate Equities, Inc. (NYSE:ARE) in its Q2 2024 investor letter. Here is what the fund said:
“We also added to existing holdings in sectors we feel are well-positioned to outperform as they rebound off current lows. This included Alexandria Real Estate Equities, Inc. (NYSE:ARE), which should benefit from a narrowing in the spread between capitalization rates and financing costs, and a potential relief in funding costs as interest rates move lower.”
2. Stanley Black & Decker, Inc. (NYSE:SWK)
Consensus ROE: 48%
Number of Hedge Fund Investors in Q2 2024: 24
Stanley Black & Decker, Inc. (NYSE:SWK) is one of the largest tools and engineered products companies in the world. The firm has a global operations base, which enabled it to generate $15.6 over its four latest quarters and post a sizeable inventory of $4.6 billion. Since high rates depress activity that creates demand for tools, Stanley Black & Decker, Inc. (NYSE:SWK)’s stock struggled between January and late July as it lost 12%. However, the firm’s fiscal Q2 earnings saw it beat analyst revenue and EPS estimates of $4.016 billion and $0.84 by posting $4.024 billion and $1.09 in the segments. This led to the stock soaring by 11%, and since the second quarter earnings, the shares are up by 12%. The quarter also saw Stanley Black & Decker, Inc. (NYSE:SWK) address another investor concern of high debt as the firm reduced its debt by $1.2 billion. A recovery in consumer spending coupled with greater industrial activity should help the firm, and these will be key for Stanley Black & Decker, Inc. (NYSE:SWK)’s margins, which are another factor that drives its hypothesis.
Stanley Black & Decker, Inc. (NYSE:SWK)’s management commented on its margin control strategies during the Q2 2024 earnings call:
“Our global cost reduction program remains on track for expected run rate savings of $1.5 billion by the end of 2024 and $2 billion by the end of 2025. Our teams continue to accelerate savings actions, which have successfully delivered $1.3 billion of run rate savings program to-date. These results reinforce our confidence in achieving our 35% plus adjusted gross margin goal. I am confident that by executing on our transform strategy, we are positioning the company to deliver higher levels of sustainable organic revenue growth, profitability and cash flow, which will drive strong long-term shareholder returns.”
1. Southwest Airlines Co. (NYSE:LUV)
Consensus ROE: 49%
Number of Hedge Fund Investors in Q2 2024: 23
Southwest Airlines Co. (NYSE:LUV) is one of the biggest airlines in America with 817 aircraft in its fleet. Compared to the S&P’s airline index, which is up by 21% year to date, its stock has gained just 7.15%. This has been because of Southwest Airlines Co. (NYSE:LUV)’s massive 16% share price drop in March, which stemmed from the current turmoil facing the airline industry due to Boeing’s production woes. Back then, it was estimated that Southwest Airlines Co. (NYSE:LUV) would receive 46 Boeing 737 MAX airplanes compared to the earlier estimate of 58 planes. This ‘turbulence’ has shifted the narrative around the airline, with activist investor Elliot Management also disclosing a stake in it in June. Now, Southwest Airlines Co. (NYSE:LUV) aims to increase the revenue that it can earn from existing passengers and run redeye flights that target underserved time slots. Consequently, its success in these initiatives will drive the stock’s performance.
Southwest Airlines Co. (NYSE:LUV)’s management commented on these initiatives during the Q2 2024 earnings call:
“Our research shows that 80% of our customers prefer an assigned seat, and 86% of our potential customers prefer an assigned seat. Further, when a customer defects from Southwest to one of our competitors, our open seating policy is cited as the number one reason why. The answer is clear, there is more demand for Southwest Airlines with an assigned seating model, and there is a significant ability to monetize the cabin more effectively with a premium seating option.
By extension, these changes are expected to drive significant value for our shareholders. We feel confident that the solution we are implementing will retain the positive elements of the Southwest Airlines experience and enable us to evolve in a manner that’s consistent with what today’s air traveler is seeking. While specific cabin layouts are still being finalized, we expect roughly one-third of seats across the fleet to offer extended legroom. We’re also designing a boarding process that retains the organized com our customers enjoy today, but also complements an assigned seating model. We’ve been studying this in depth to preserve our operational efficiency and how quickly we turn an aircraft. We’ve conducted both live boarding tests to understand passenger movement in a real world environment and also more than 8 million digital simulations to test different boarding options.”
LUV is one of the top stocks with the highest consensus ROE according to Goldman Sachs. While we acknowledge the potential of LUV 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 LUV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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