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 Alphabet Inc. (NASDAQ:GOOGL) 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).
3. Alphabet Inc. (NASDAQ:GOOGL)
Number of Hedge Fund Shareholders In Q1 2024: 222
Alphabet Inc. (NASDAQ:GOOGL) is the holding company for Google. Despite its heft, the average of 45 one year analyst ratings is Strong Buy, and the average share price target is $191.83 – implying that Wall Street is still optimistic for its future. However, June 2024 is seeing Alphabet Inc. (NASDAQ:GOOGL) lay off people in its cloud computing division as it battles a tough economy. Stifel’s Mark Kelley increaed Alphabet Inc. (NASDAQ:GOOGL)’s share price target to $196 from $174 in May 2024. The upgrade came after a detailed April 2024 note that had increased the target to $174 from $154 and shared that the price target had factored in a 26x multiple for Alphabet Inc. (NASDAQ:GOOGL)’s NTM EPS. The note cited confidence in the growth of the advertising industry and faster US eCommerce growth as some reasons behind the bullishness.
For their March quarter of 2024 shareholdings, 222 out of the 919 hedge funds profiled by Insider Monkey had held a stake in Alphabet Inc. (NASDAQ:GOOGL). Ken Fisher’s Fisher Asset Management owned the biggest stake which was worth $6.9 billion.
Alphabet Inc. (NASDAQ:GOOGL)’s forward price to earnings ratio is 22.94, which makes it nearly evenly valued compared to the S&P 500’s price to forward earnings ratio of 21. Additionally, while Alphabet Inc. (NASDAQ:GOOGL)’s shares have gained 158% over the past four years, its revenue has grown by 68% – creating some room for a potential claw back in the share price. Baron Fifth Avenue Growth Fund praised Alphabet Inc. (NASDAQ:GOOGL)’s AI initiatives in its Q1 2024 investor letter as it shared:
Google has also taken advantage of its distribution to unlock various benefits of GenAI, such as helping advertisers generate creative content in different formats or helping them optimize their budgets across Google’s various platforms. Additional opportunities that GenAI creates for Google include improving its existing offerings (e.g., GenAI offerings for YouTube creators) and helping drive demand for Google Cloud, which now offers a managed AI service called Vertex AI. We continue to monitor the risk from GenAI disrupting search, particularly given Google’s large market share today but believe the valuation is attractive and reflects too high of a probability for a bad outcome.
Alphabet also has real value in assets such as Waymo, which are not factored into valuation today (and are potentially included at a negative valuation as they currently generate losses, hurting EPS). We also believe Alphabet has further room to improve its cost discipline, given its high margin core Search business and similar efficiency measures taken at other large technology companies. All together, we believe Alphabet has a reasonable path to growing EPS at a mid-teens rate for years to come. On the back of Alphabet’s strong fundamentals and a reasonable valuation (approximately 20 times P/E (On 2025 expected EPS consensus as collected by FactSet) for a business of this dominance and quality), we decided to add Alphabet to the portfolio.
Overall, GOOGL ranks 3rd 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 GOOGL, our conviction lies in the belief that there are other AI stocks that 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 GOOGL 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.
