Is Alphabet Inc (NASDAQ:GOOGL) A Good Stock To Buy Now?

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. Our research have shown that hedge funds’ most popular large-cap stock picks generated an annual alpha of about 2 percentage points. This isn’t a large enough margin to justify large hedge fund fees but it is large enough to pay attention to these picks and use this information as an input in our decision making process.

Most financial journalists aren’t much different than most political journalists. They focus on “news” that will garner the most clicks. That’s why you have probably seen dozens of articles about hedge funds’ large losses in Valeant or energy stocks this year. We compiled hedge fund positions from 800+ long/short equity hedge funds and created a giant portfolio that is valued at $1.6 trillion. We use this portfolio’s performance to track hedge funds’ performance in real-time. Through the end of February this portfolio which consists of large and small-cap stocks lost 4.7%, vs. a loss of 5.2% for the S&P 500 Total Return Index and a loss of 8.8% for the Russell 2000 Index.

These results confirm what we have uncovered in our research: following hedge funds’ large-cap stock picks gives investors a small edge whereas following hedge funds’ small-cap consensus picks gives investors a big advantage over small-cap ETFs. With this in mind, let’s take a look at the recent hedge fund activity surrounding Alphabet Inc (NASDAQ:GOOGL).

Is Alphabet Inc (NASDAQ:GOOGL) a good stock to buy? Prominent investors are getting more optimistic. The number of long hedge fund bets went up by 25 recently. In terms of absolute popularity GOOGL is the second most popular stock among hedge funs. However,  since Alphabet Inc trades under two ticker symbols we can even argue that it is in fact the most popular stock because the aggregate hedge fund dollars invested in the stock is the highest among all stocks. So, why do hedge funds love Alphabet Inc so much? Let’s a take a look at RV Capital’s comments about the stock in the first half of 2016:

“Google grew revenues by 19% in 2014 to US$66 bn, an astonishing rate for a large company. Its net income from continuing operations was US$13.9 bn compared to US$13.3 bn in the prior year, implying a more modest 4% growth. Continuing earnings exclude a gain from the sale of Motorola Mobile in 2014 and a loss from the sale of Motorola Home in 2013. E26The discontinuity between Google’s revenue and earnings growth is the main source of controversy amongst investors. There is agreement on its cause: precipitous growth in all operating costs, in particular research. R&D spend was US$6.1bn in 2012, US$7.1bn in 2013 and – wait for it – US$9.8bn 2014. The controversy is whether such a high level makes sense. The majority seem to think not. They view Google’s various research projects as flights of fancy of its Billionaire owners. Needless to say, I am in the minority. Frankly, it is a mystery to me why there is so much pessimism around Google’s capital allocation. Its track record is virtually blemishfree. YouTube, Android, Chrome, and Maps are just a few of its home runs. Recall the costs entailed by Baidu because it did not invest early in a mobile operating system and a video site. Even when projects do not work, the losses are relatively small. Furthermore, there is value and learning in trying to do new things. In “Work Rules!” Lazlo Bock, Google’s Head of HR, explains the importance of Google’s audacious projects best known as moon shots – if you want to get the best people, you have to set the most ambitious E26 challenges. Larry Page often says that he does not understand Wall Street’s concern that Google will spend too much on moon shots. His concern is finding sufficient opportunities to avoid spending too little. Given that Google has US$64 bn cash in the bank, this strikes me as the more legitimate concern. Larry goes on that he sees sufficient opportunity to deploy this capital if he surveys the company’s opportunity set. I find that reassuring, though no doubt it would be better for the share price development in the short run if he were to announce a big share buyback. Long term owners can be grateful that Larry and not Wall Street is calling the shots.”

Billionaire Andreas Halvorsen is even more bullish than RV Capital. Here is what Halvorsen said about the stock in his third quarter investor letter:

“Among long positions, Alphabet was the biggest winner, contributing 1.2% to both funds. Our core thesis revolves around the company’s transition from desktop to mobile. In our opinion, prevailing concerns around this transition are misguided and mobile represents a tremendous revenue opportunity. During the quarter, the stock price appreciated on strong earnings growth in support of our thesis. Pricing on mobile advertising improved, narrowing the gap to desktop ad pricing; YouTube views accelerated meaningfully; and desktop search continued to grow. We think that the secular shift of advertising dollars from traditional media to search and YouTube will drive substantial revenue growth going forward. Since cost growth is decelerating as a result of less aggressive hiring, we expect margins to expand. We believe that management, following the recent reorganization, is seeking incremental operating efficiencies and streamlining capital allocation. We find the current valuation compelling, especially in light of the company’s growing net cash position, and the likelihood that strong revenue growth combined with improved cost control will result in a higher price-to-earnings multiple.”

Now, we’re going to take a glance at the latest action surrounding Alphabet Inc (NASDAQ:GOOGL).

How are hedge funds trading Alphabet Inc (NASDAQ:GOOGL)?

At the end of the fourth quarter, a total of 154 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 19% from one quarter earlier. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Viking Global, managed by Andreas Halvorsen, holds the largest position in Alphabet Inc (NASDAQ:GOOGL). Viking Global has a $1.44 billion position in the stock, comprising 5.4% of its 13F portfolio. Sitting at the No. 2 spot is Lansdowne Partners holding a $1.07 billion position; 7.4% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions contain Ken Fisher’s Fisher Asset Management, Ken Griffin’s Citadel Investment Group and Keith Meister’s Corvex Capital.

As industrywide interest jumped, key money managers have been driving this bullishness. Corvex Capital initiated the largest position in Alphabet Inc (NASDAQ:GOOGL). Corvex Capital had $583.5 million invested in the company at the end of the quarter. First Eagle Investment Management also made a $410.7 million investment in the stock during the quarter. The other funds with brand new GOOGL positions are Cantillon Capital Management, Stephen Mandel’s Lone Pine Capital, and James Crichton’s Hitchwood Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Alphabet Inc (NASDAQ:GOOGL) but similarly valued. These stocks are Microsoft Corporation (NASDAQ:MSFT), Berkshire Hathaway Inc. (NYSE:BRK-B), and Exxon Mobil Corporation (NYSE:XOM). This group of stocks’ market valuations are closest to GOOGL’s market valuation.

As you can see these stocks had an average of less than 100 hedge funds with bullish positions and the average amount invested in these stocks was $15.3 billion. That figure was $29.2 billion in GOOGL’s case. Alphabet Inc (NASDAQ:GOOG) is the most popular stock in this table. On the other hand Exxon Mobil Corporation (NYSE:XOM) is the least popular one with only 68 bullish hedge fund positions. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.