We recently compiled the list of the 13 Best Quality Stocks To Buy according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where Adobe Inc. (NASDAQ:ADBE) stands against the other quality stocks.
Investing in 2024 is significantly different from investing in the 1950s and onward. This is because these days investors have to. sift through thousands of stocks and countless data points and signals to separate the wheat from the chaff and make the right investment decisions. Amidst this hubris, the ability to pick out ‘quality’ stocks becomes important, and there’s quite a lot of financial literature available that helps determine what such stocks are.
Typically, stock analysis involves analyzing a firm’s financial statements to determine profitability, operating strengths, cost control, asset utilization, and other metrics. Some of these are also present in financial literature that discusses quality stocks. One such research paper comes courtesy of researchers associated with Research Affiliates. They point out that metrics that typically define a quality stock include earnings stability, capital structure, profitability, accounting practices, and investing strategies. Within these, the quality factors that were also related to returns were investment strategies, dividend payouts, profitability, and accounting strategies.
The next thing to ask is, whether quality stocks are any different from standard run of the mill stocks when it comes to share price performance. For context, the last 12 months on the stock market have been dominated by a few key themes. These are artificial intelligence, inflation, interest rates, and GDP growth. Higher rates and inflation are bearish stock indicators, while growth and AI have proven to have kept the market buoyant at a time when rates are at two decade high levels. So, over the past year, exchange traded funds that track quality stocks have appreciated by 12% to 27%, the midpoint of which is slightly lower than the S&P 500’s 23% price appreciation over the same time period. However, picking the right quality stocks appears to have its advantages as well, since the high end of the performance, i.e. 27%, is far higher than what the index has delivered.
ETFs and research aren’t the only ones that talk about quality stocks. One hedge fund that’s become quite well known for its focus on quality stocks is Cliff Asness’ AQR Capital Management. One of the largest hedge funds in the world, AQR had a 13F investment portfolio worth $58 billion as of Q1 2024 end according to Insider Monkey’s research. Close to a quarter of its portfolio is invested in the technology industry, and the second biggest category is services stocks. AQR focuses on stocks that follow its strategy of Quality Minus Junk or QMJ. According to its founder Cliff Asness, a quality stock is defined by its shareholder payouts, growth, profitability, and sound financial and general management. We recently took a look at some top AQR Capital management stocks and you can check them out by looking at 13 Best Stocks To Buy Now According To Billionaire Cliff Asness.
Before we head to our list of the best quality stocks, a general overview of the stock market is relevant. Right now, investors are wondering when the first interest rate cuts might occur. The latest bit on this front came in the form of the Personal Consumption Expenditure (PCE) data from the Commerce Department. This data set revealed that the 12 month inflation in the US stood at 2.7% in April 2024, which was still higher than the Fed’s preferred rate of 2%. Additionally, the data also provided investors with some bearish signals. These were apparent in the readings for consumer spending, which slowed down to 2% in the first quarter of 2024 over the robust 3.3% reading in Q4 2023.
Lower spending means less money sloshing in the economy, and while this might help reduce prices, it can also affect business performance, economic growth, and naturally, stock market performance. Data from the CME Fed Watch Tool shows that 47% of all investors polled expect a 25 basis point rate cut in September, while an additional 7.5% believe that the Fed might get generous and cut rates by as much as 50 basis points.
With these details in mind, let’s take a look at some top quality stocks that hedge funds are buying.
Methodology
To make our list of the best quality stocks to buy, we ranked the 30 largest constituents of a quality stock ETF and picked out those with the highest number of hedge fund investors in Q1 2024. By the way, Insider Monkey is an investing website that tracks the movements of corporate insiders and hedge funds. 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).
Adobe
9. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Shareholders In Q1 2024: 108
Adobe Inc. (NASDAQ:ADBE), the well known global productivity software firm, is down by 23% year to date, which stands in contrast to the S&P 500’s 11% gain. Among the reasons behind the drop is the latest quarterly result that saw Adobe Inc. (NASDAQ:ADBE) beat analyst EPS and revenue estimates. Wall Street was focused on the current quarter, and the shares tumbled by 11% as the high end of Adobe Inc. (NASDAQ:ADBE)’s $5.30 billion in guidance missed analyst estimates of $5.31 billion.
By the end of this year’s first quarter, 108 hedge funds covered by Insider Monkey’s study were Adobe Inc. (NASDAQ:ADBE)’s stakeholders. Among these, Ken Fisher’s Fisher Asset Management owned the most valuable stake which was worth $2.2 billion.
While the shares are down, Adobe Inc. (NASDAQ:ADBE) could turn the tide in the AI industry. Its tools have generated more than six billion AI assets since Q1 2023, and the firm seems to be focusing on creating new AI tools as R&D expenses grew by $112 million annually in the latest quarter. A forward P/E of 24.75 still makes the stock slightly overvalued over the S&P 500. While the revenue guidance led to a share price fall earlier this year, Adobe Inc. (NASDAQ:ADBE) is still a leading player in the enterprise software market. During its earnings call for the first quarter of 2024, Adobe Inc. (NASDAQ:ADBE) president David Wadhwani elaborated that Adobe Express, his firm’s cloud based content creation tool, had integrated Adobe’s Firefly Services AI platform, leading to ‘delighted’ customers generating content like “images, vectors, designs and text effects.”
Here is how RiverPark explained the recent weakness in Adobe shares:
“Adobe Inc. (NASDAQ:ADBE): ADBE was our last top detractor in the quarter following OpenAI’s announcement of an AI-based text-to-video offering called Sora. Some investors seem to believe that AI and the Sora product specifically pose an existential threat to Adobe’s Creative Cloud Suite. We do not share these concerns and believe that AI is a tremendous growth opportunity for Adobe. In fact, in a recent conference call, management described how innovative AI-based solutions are expected to be drivers of growth across its product lines.
ADBE is the leading software and solutions provider in the content creation and content management space. The company offers a line of products and services used by creative professionals, communicators, businesses of all sizes, and consumers for creating, managing, delivering, measuring and optimizing content and experiences across personal computers, smartphones, other electronic devices and digital media formats. The company has grown revenue in the double-digit percent range for the last decade, and as it enters its 42nd year since its founding, we expect ADBE to continue to grow revenue greater than 10% per year through 2028. The company generates 40% EBITDA margins, which we think can expand to nearly 50%, and we believe the company will more than double last year’s roughly $7 billion of free cash flow over the next five years.”
Overall, ADBE ranks 9th among the 13 Best Quality Stocks To Buy now. You can visit 13 Best Quality Stocks To Buy to see the other quality stocks that are on the hedge fund radar. While we acknowledge the potential of ADBE, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. The article is originally published at Insider Monkey.
