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 NVIDIA Corporation (NASDAQ:NVDA) 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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4. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Shareholders In Q1 2024: 186
Chip designer NVIDIA Corporation (NASDAQ:NVDA) is the most popular AI stock. The start of June 2024 was an important time for the firm as CEO Jensen Huang shared that NVIDIA Corporation (NASDAQ:NVDA) isn’t stopping with its AI chips and will launch a new Blackwell Ultra chip in 2025. Blackwell is the firm’s latest AI chip platform, and H200 chips were slated to start shipments in Q2. NVIDIA Corporation (NASDAQ:NVDA)’s latest bit of AI announcements expand on industrial uses cases of the new technology. At Computex in Taiwan, the firm revealed that NVIDIA’s AI Enterprise-IGX will now be paired with its sensor processing platform called Holoscan. NVIDIA IGX’s latest refresh boosts its AI processing capability to 1,705 trillion operations per second, allowing use cases such as astronomy and medical imaging to utilize greater computing capacities.
By Q1 2024 end, 186 hedge funds covered by Insider Monkey’s research were NVIDIA Corporation (NASDAQ:NVDA)’s stakeholders. Rajiv Jain’s GQG Partners held the most valuable stake which was worth $12 billion.
Given that NVIDIA Corporation (NASDAQ:NVDA)’s shares have gained a massive 1,756% over the past four years, the question everyone’s asking is is there any growth left? Its revenue has grown from $16 billion in 2021 to $79 billion over the last 12 months, but NVIDIA Corporation (NASDAQ:NVDA)’s price to forward earnings ratio is 42.19 – just 2x of the S&P 500’s 21. Whether the Blackwell Ultra pushes the forward P/E down remains to be seen. Baron Fifth Avenue Growth Fund was able to keenly differentiate between the broader cyclical nature of the chip industry and NVIDIA Corporation (NASDAQ:NVDA)’s unique platform level strengths in its Q1 2024 investor letter where it shared:
It is not lost on us that semiconductors is a notoriously cyclical industry. Historically, the hyperscalers (AWS, Azure, GCP, etc.), who are among NVIDIA’s largest customers, have not invested/spent/consumed CapEx in a straight line. It will be more than a mild surprise then if there was no pullback in demand leading to a significant growth deceleration and a potentially meaningful correction in the price of the stock, sometime in the near future. So, it is incumbent upon us to manage the size of this investment appropriately, while continuing to imagine what the future will likely look like without losing sight of what reality on the ground is today.
Then again…NVIDIA is not just a semiconductor company. Many investors have missed the boat thinking that Apple is just a smartphone company, Amazon is just a retailer, and Tesla is just a car company. We have long argued that just like the other three, NVIDIA is a platform. We are more certain of this now than ever before.
Overall, NVDA ranks 4th 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 NVDA as an investment, 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 NVDA 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.