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 Visa Inc. (NYSE:V) 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).
Visa Card
5. Visa Inc. (NYSE:V)
Number of Hedge Fund Shareholders In Q1 2024: 156
Visa Inc. (NYSE:V) is another household name, best known for its debit and credit cards. The average of 34 one year share price targets for the firm is $310.37 and the shares are rated Strong Buy on average. Visa Inc. (NYSE:V) has also beaten adjusted analyst EPS estimates in all four of its latest quarters, and it pays 52 cent quarterly dividend for a 0.76% yield. The historic Mastercard analyst note from Piper Sandler that we covered above also mentioned its larger rival Visa Inc. (NYSE:V). In the note, the firm shared that Visa Inc. (NYSE:V) can also grow its revenue by 10.7%, and along with Mastercard, target a $255 trillion market. Like Mastercard, Ramnani set an Overweight rating on Visa Inc. (NYSE:V)’s shares and ascribed then a $322 share price target.
For their March quarter of 2024 shareholdings, 156 hedge funds part of Insider Monkey’s database had bought a stake in Visa Inc. (NYSE:V). Chris Hohn’s TCI Fund Management held the most valuable stake which was worth $4.6 billion.
Visa Inc. (NYSE:V)’s price to forward earnings ratio is 27.55, making it overvalued over the market’s ratio of 21. However, its shares have appreciated by 43% over the past four years, which roughly matches the four year revenue growth of roughly 49%. This could mean that the shares hold their gains even if the economy slows down and Visa Inc. (NYSE:V)’s revenue slows. Like Piper Sandler, Wedgewood Partners also shared optimism for Visa Inc. (NYSE:V)’s future trajector in its Q1 2024 investor letter where it highlighted:
Visa stock posted a small negative drop during the quarter. In the 2irst quarter, the Company grew earnings per share +11% as payment volume growth was up +8% and cross-border payment grew a solid +16%, adjusted for currency. Beyond their consistent growth and execution, recent regulatory trends have caught considerable investor attention. The Company’s networks and value-added services drive enough economic value to bank customers and retailers that the addressable market for payments should continue growing at a healthy rate for many more years, regardless of recent regulatory changes. Visa’s value- added services can be extended to less-sophisticated, emerging non-Visa networks to help grow the overall payment ecosystem that make up the vast global payment addressable market. For example, not long after debit interchange rates were regulated last decade, Visa began an aggressive push to allow non-bank 2inancial institutions access to Visa’s networks, which helped drive more interchange volume to banks and offset lower interchange rates. This was a key element that spawned the massive “Fintech” industry that exists today. We continue to expect Visa’s scale and breadth of service offerings will help them drive attractive growth at stellar margins along with the overall payments’ ecosystem.
Overall, V ranks 5th 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 Visa 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 V 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.
