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 Apple Inc. (NASDAQ:AAPL) 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).
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6. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Shareholders In Q1 2024: 150
Tech giant Apple Inc. (NASDAQ:AAPL) is a household name. These days, the rumor mill is adamant when it comes to Apple and AI as sources insist that Apple Inc. (NASDAQ:AAPL) is interested in partnering up with OpenAI to bring AI functionality to its Siri virtual assistant and validate the consumer use cases for the highly hyped technology. Amidst broader concern on Wall Street about the iPhone and Apple’s China woes, Wedbush’s Dan Ives was filled with optimism in a May 2024 interview. During the talk, he shared that 70% of China’s 225 million iPhones were yet to be upgraded, and the introduction of AI to the Pro model could very well see Apple Inc. (NASDAQ:AAPL) grow the iconic Average Selling Price (ASP) in the region.
As Q1 2024 ended, 150 hedge funds part of Insider Monkey’s database had held a stake in Apple Inc. (NASDAQ:AAPL). Warren Buffett’s Berkshire Hathaway held the largest stake which was worth $135 billion.
Due to its heft, it’s hard for a firm like Apple Inc. (NASDAQ:AAPL) to continue to grow in triple digit percentages. However, its heft also allows the firm to generate massive amounts of cash that it then uses to buy back shares. Apple Inc. (NASDAQ:AAPL)’s latest share buybacks are worth $110 billion, which is more valuable than the market value of most companies. Additionally, a forward P/E ratio of 29.33 makes the stock slightly overvalued compared to the S&P 500.
Polen Capital shared some of the stresses that have plagued Apple Inc. (NASDAQ:AAPL)’s shares in 2024, which have stood out from big tech due to a rather modest 3.6% year to date gain. The fund shared in its Q1 2024 investor letter:
The largest relative contributors to the Portfolio’s performance during the first quarter were SAP, Apple Inc. (NASDAQ:AAPL) (not owned), and Amazon.
…The zero weight to Apple was another notable relative contributor in the quarter. More recently, Apple has come under pressure from a confluence of issues ranging from a weak iPhone cycle, market share erosion in China, mounting regulatory pressure around App Store fees in Europe, and a lawsuit from the U.S. Justice Department accusing the company of anticompetitive practices in its iPhone business. All this has resulted in the stock down -11% year to date, underperforming the overall Index by -19%—Apple’s worst relative performance quarter since 2013. It remains a great business and one we follow, but we’re content not owning it right now, given its growth prospects relative to its valuation.”
Apple shares currently trade at a forward PE ratio of 29 which is much higher than Alphabet’s and Meta’s forward PE ratios.
Overall, AAPL ranks 6th 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 Apple as an investment, 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 AAPL 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.