In this piece, we will take a look at Morgan Stanley’s Best Overweight & Quality Stocks.
The close of September has cemented the paradigm shift on Wall Street. With the Federal Reserve’s first interest rate cut being all that investors could hope for as it reduced rates by 50 basis points, since the cut, the flagship S&P stock index and the broader NASDAQ stock index are up by 2% and 3%, respectively. The rate cut has also now moved Wall Street’s focus to the next big catalyst for the stock market, i.e, the third quarter earnings season.
For a market that has touched new highs this year due to artificial intelligence, the second quarter earnings season was nothing short of fireworks. It saw the AI narrative wobble temporarily after mixed results from the world’s leading AI GPU designer and the semiconductor industry reckoned with the fate of the semiconductor manufacturing stock that ranked 5th on the list of Jim Cramer’s Top 12 Must-Watch Stocks.
Starting with the chip maker, its second quarter earnings were nothing short of a bloodbath. They saw the firm’s non GAAP net income drop by a whopping 85% annually and turn a year ago GAAP net income into a non GAAP loss of $1.6 billion. At the same time, its gross margins dropped by 0.4 percentage points, and in the worst example of the cherry on top, the firm also announced that it will be suspending dividends starting from the fourth quarter. As a result, its shares tanked by 30% after the earnings, and since then, we’ve seen multiple reports claim that other companies are interested in acquiring it.
As for the GPU designer, its second quarter revenue jumped by 122% – a no small feat considering that the year ago quarter’s revenue was $13.5 billion. However, even as the Q2 revenue of $30 billion beat analyst estimates of $28.7 billion which was fueled by its AI data center division’s revenue jumping by 154% annually, the shares fell by 6% in extended trading. At the heart of the fall was a tepid third quarter guidance of $32.5 billion (analyst estimates were $31.77 billion), a gross margin miss by 0.1 percentage point, a Q3 margin guidance miss by 0.5 percentage points, and the delay of its Blackwell GPU to the fourth quarter. For investors already worried about the ability of AI to generate a profit, the margin miss in particular wasn’t comforting. Consequently, since the earnings report, the firm’s shares are down by 1%.
However, investment bank Morgan Stanley sent the GPU designer’s shares soaring by 6.8% in September in a bullish note that shared that the firm could earn $10 billion in its fourth quarter alone from the latest Blackwell chips. This upgrade came on the back of MS remaining consistent in its analysis of the stock market this year. The key themes that it has identified are the labor market, commercial real estate, and the split in the stock market between large and small cap stocks.
In July, the bank shared that there was “ample room for equities performance to broaden, but this requires a cyclical recovery.” In simpler terms, it means that MS believed that for small cap equities to catch up to large caps in performance, the economy has to perform well. If you’re wondering how wide this gap is, data shows that for small and medium cap and large cap stocks which are in the top 20% in terms of free cash flow margins, the small and mid caps have a forward price to earnings ratio of 0.74x relative to large caps as of April 2024, which is quite low when compared to the April 2009 peak of 1.62x. MS reiterated this belief in its August report, which shared that small cap outperformance “requires economic growth acceleration with lower interest rates. While recent inflation data and the resulting decline in rates was a lift to small cap, softer economic data may constrain its continued outperformance.”
However, MS’ September report took somewhat of a different tune. It focused on the clean energy and infrastructure investments in the US to share that these could help some segments of the American stock market that are typically dependent on growth in economic activity. Government spending through the Inflation Reduction Act (IRA), the Bipartisan Infrastructure Law (BIL), and the CHIPS and Science Act have led to roughly $500 billion in commitments by the private sector to invest in a diverse set of areas ranging from roads, to clean energy manufacturing and heavy industry.
As per the bank, “Government policies such as the CHIPS Act, the Inflation Reduction Act (IRA), and the Infrastructure Act are sponsoring growth in many areas of U.S. manufacturing. These trends could offer through-the-cycle structural support to areas of the economy that are traditionally very cyclical.” On the data front, MS reveals that while in 2022, US manufacturing capacity as a percentage of 2017 output sat at ~126%, this has jumped to nearly 129% as of 2024.
Shifting gears, the third quarter earnings season will soon start to shape how investors view the market. Data from LSEG shows that the flagship S&P index is expected to deliver 5.4% annual earnings growth during Q3. FactSet is more cautious, as it shares that the index should grow earnings by 4.6% annually to mark its sixth straight quarter of growth. MS is of the view that the economy has to continue to deliver on the data front if the stock market is to perform well.
In a recent podcast, the bank’s chief investment officer and chief strategist, Mike Wilson, shared that “the unemployment rate will need to decline and the payrolls above 140,000 with no negative revisions to prior months. Meanwhile, I am also watching several other variables closely to determine the trajectory of growth. Earnings revision breadth, the best proxy for company guidance, continues to trend sideways for the overall S&P 500 and negatively for the Russell 2000 small cap index. Due to seasonal patterns, this variable is likely to face negative headwinds over the next month.”
With these details in mind, let’s take a look at Morgan Stanley’s top stocks that the bank is Overweight on.
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Our Methodology
To make our list of Morgan Stanley’s best Overweight and quality stocks, we ranked the bank’s recent list of 66 stocks with Overweight ratings, a higher than median quality score, and one month upward EPS revisions by their percentage one month average analyst revisions. The average EPS data was sourced from Yahoo Finance as of September 26th 2024, and the top 25 stocks with non zero percent revisions were selected.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? 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).
25. The Gap, Inc. (NYSE:GAP)
Number of Hedge Fund Holders In Q2 2024: 39
Average Analyst EPS % Revision: -3.4%
The Gap, Inc. (NYSE:GAP) is a well known American apparel retailer. Its shares have been on quite a ride this year after they jumped by 49% in March only to crater by 29% by mid April. Then, the stock soared by 43% in late May and early June, but this was transient as well since the shares are down by 28% since then. Consequently, the keys to The Gap, Inc. (NYSE:GAP)’s hypothesis lie in these share price movements. Starting from the March jump, the stock soared after Q4 2023 net income of $185 million and revenue of $4.3 billion beat analyst estimates. In May, the stock soared as the firm beat first quarter earnings and posted $0.41 in EPS and $3.39 billion in revenue. Analysts had expected an EPS of $0.14 and revenue of $3.29 billion. While beats are common, they injected life into The Gap, Inc. (NYSE:GAP)’s shares since the firm had started a turnaround plan under its new CEO and investors bet on future benefits from the successful results. This plan focuses on improving margins through reducing promotion spend and focusing on product portfolios instead. However, weakening consumer sentiment continued to deal blows to the shares after that. The Gap, Inc. (NYSE:GAP) maintained strong performance during the Q2 earnings, and continued execution of the strategy coupled with macro driven consumer spend should drive the stock moving forward.
The Gap, Inc. (NYSE:GAP)’s management commented on its strategy during the Q2 2024 earnings call:
“We are building stronger brand identities, supported by trend-right products, amplified through more compelling storytelling with an innovative media mix that is translating to greater cultural relevance. We are working to provide our customers with a more engaging omnichannel experience and aim to execute with excellence. Each brand is at a different point in the process and I’m encouraged by the improvements we are driving across the portfolio. I’ll take you through how these elements are showing up at each one of our brands, starting with Old Navy. Over the past year, our operational rigor has enabled us to strengthen Old Navy’s foundation and brand identity. We are winning in key categories with more clarity in pricing and in-store navigation connecting our customers with products they want and compelling storytelling.
As a result, we are driving market share gains and positive comps. Our trend-right product is driving share growth in women’s, which is important as she is the gateway to the family.”
24. Unity Software Inc. (NYSE:U)
Number of Hedge Fund Holders In Q2 2024: 34
Average Analyst EPS % Revision: -2.7%
Unity Software Inc. (NYSE:U) is a software company that provides tools to developers to create video games. It is a sizeable company with operations in Europe, the US, and China along with a platform that supports consoles, PCs, headsets, and handhelds. Given the fact that it focuses exclusively on video games, Unity Software Inc. (NYSE:U)’s hypothesis is primarily dependent on consumer spending and a steady stream of titles to attract users to its titles. Additionally, being a software company also. allows it to benefit from a high margin business. Unity Software Inc. (NYSE:U)’s shares are down 42% year to date, while peers like EA have gained 5.9%. This means that the gaming company’s troubles are of its own doing, and stem primarily from a pricing error last year which saw it try to charge fees based on the number of users installing a game. The decision was not well received, and Unity Software Inc. (NYSE:U) followed it up by reducing its workforce. During Q2, Unity Software Inc. (NYSE:U)’s revenue dropped by 16% and it slashed guidance for the year to a midpoint of $1.685 billion. Morgan Stanley is optimistic though, as it believes that the share price drop and the guidance cut have now removed the risks from the share. The bank also believes that Unity Software Inc. (NYSE:U) commands a 70% mobile game engine market share which provides it with a stable market to navigate through.
Carillon Tower Advisors mentioned Unity Software Inc. (NYSE:U) in its Q2 2024 investor letter. Here is what the fund said:
“Unity Software, a leading provider of mobile game development and monetization software, saw shares decline as the company detailed a restructuring strategy that will take some time to realize. Unity plans to divest its unprofitable and lower-margin segments such as professional services and to reaccelerate growth rates through product development and new partner distribution strategies. We expect the company to be largely through the transition by late 2024, and we believe investors should begin to anticipate the positive 2025 outlook well in advance.”
23. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders In Q2 2024: 92
Average Analyst EPS % Revision: -1.2%
Bank of America Corporation (NYSE:BAC) is one of the biggest banks in America. It is a diversified bank, with a presence across several sectors such as consumer banking, investment banking, corporate banking, and wealth management. Bank of America Corporation (NYSE:BAC)’s heft is evident through its large customer base, with estimates suggesting that it serves the needs of 66 million customers. However, its exposure to the retail sector often proves to be a double edged sword too. This is because Bank of America Corporation (NYSE:BAC) has struggled with high interest expense due to record high interest rates. The bank’s interest expense jumped to $32.4 billion in H1 2023, to mark a 754% annual growth. These have continued to affect Bank of America Corporation (NYSE:BAC) in 2024, as during H1 its interest costs jumped by 40% and net interest income dropped by $900 million. Moving forward, as rates drop, the bank can see lower costs and higher growth in its investment banking and brokerage businesses. However, these should also be dependent on the broader economic picture as any economic weakness – perceived or otherwise – can create headwinds for the stock.
Bank of America Corporation (NYSE:BAC)’s management commented on investment banking during the Q2 2024 earnings call. Here is what they said:
“We grew investment banking fees 29% year-over-year and saw sales and trading revenue increase 7%. Global Markets had its 9th consecutive quarter of year-over-year growth in sales and trading revenue, a good job by Jimmy DeMare and his team. Card and service charge revenue also grew by 6% year-over-year in our Consumer business. Much of this fee growth is a result of our intensity around organic growth, and is a testament to the diversity of our operating model. Now on to slide three. Organic growth has been driven by several key factors. First, we focus on our customers. We continue to place them at the center of everything we do. Consumer led the way in delivering solid organic growth with high-quality accounts and engaged clients. For the 22nd consecutive quarter, we had significant net new consumer checking accounts.
We expanded our customer base and our market share. Specifically, we added 278,000 net new checking accounts this quarter, which brings our first six months of 2024 to more than 500,000. In wealth management, we added another 6,100 new relationships this quarter. In our commercial businesses, we added 1,000s of small businesses and 100s of commercial banking relationships. This has led to now managing $5.7 trillion in client balances, loans, deposits, and investments across the consumer and wealth management client segments. In those areas, we saw flows of $58 billion in the past four quarters. Our emphasis on personalized financial solutions and superior customer service has strengthened customer loyalty, attracted new clients across all our businesses.”
22. MetLife, Inc. (NYSE:MET)
Number of Hedge Fund Holders In Q2 2024: 37
Average Analyst EPS % Revision: -0.9%
MetLife, Inc. (NYSE:MET) is an insurance company based out of New York City. It is one of the biggest companies of its kind, and along with life and health insurance, the company also offers pensions, retirement benefits, and other associated products. Because of their business models, insurance companies are particularly vulnerable to changes in interest rates. Roughly 97% of MetLife, Inc. (NYSE:MET)’s H1 2024 revenue came from premiums and investment activities, with premiums alone reflecting 65% of the revenue. This means that if premiums drop, then the insurance company stands to take a sizeable hit to its income statement. Insurance companies are also often forced to raise rates if interest rates drop as their investment earnings drop. For MetLife, Inc. (NYSE:MET), this could mean that the firm’s investment income drops in the future as it involves its asset and investment portfolio. However, pension risk transfer activity in the US is growing as firms look to cut costs. This could create some tailwinds for MetLife, Inc. (NYSE:MET) and help it buffer against potential revenue drops.
During its Q2 2024 earnings call, MetLife, Inc. (NYSE:MET) shared key details about how interest is affecting its business:
“Recurring investment income has benefited from higher interest rates, partially offset by the roll-off from higher interest rates caps. In addition, we have seen VII improvement driven by higher private equity returns. Turning your attention to the right side of the page. This shows our new money yield versus roll-off shows our new money yield versus roll-off yields since second quarter of 2021. Over the last nine quarters, new money yields have outpaced roll-off yields, consistent with higher interest rates. In the second quarter of 2024, our global new money rate achieved the yield of 6.27%, 63 basis points higher than the roll-off rate. We anticipate that the new money yields will remain above roll-off yields given the prevailing interest rate environment.
However, the spread can fluctuate depending on the mix of sales across our businesses.”
21. T-Mobile US, Inc. (NASDAQ:TMUS)
Number of Hedge Fund Holders In Q2 2024: 64
Average Analyst EPS % Revision: -0.8%
T-Mobile US, Inc. (NASDAQ:TMUS) is a major American telecommunications carrier that provides voice, broadband, and other products. As a result, its hypothesis is dependent on subscriber growth, revenue per account, and fixed wireless subscriber base. Since it’s a carrier, T-Mobile US, Inc. (NASDAQ:TMUS)’s business is also somewhat hedged against economic downturns and provides the stock a defensive aspect as well. The carrier is also one of the top players in its industry when it comes to free cash flow margins. T-Mobile US, Inc. (NASDAQ:TMUS)’s adjusted free cash flow grew by 54% during Q2, which set a new record for the firm. It faces several catalysts that can help the share price in the future, especially when it comes to fiber internet and fixed wireless growth. As of Q2, T-Mobile US, Inc. (NASDAQ:TMUS) had 5.6 million fixed wireless broadband subscribers, and it also acquired fiber broadband provider Metronet earlier this year to bring 2 million fiber consumers in its fold.
T-Mobile US, Inc. (NASDAQ:TMUS)’s management shared key details about its fiber plans during the Q2 2024 earnings call:
“First of all, we’re just really excited about where we are. This was a terrific transaction for us to be able to partner with KKR to acquire Metronet on top of our previous transaction to partner to acquire Lumos. So, now we have the beginnings of a critical mass in the space. For me, this is big. I mean, these two transactions taken together with our partnerships in the wholesale arena are going to allow us to reach millions of homes. The Lumos transaction, we see 3.5 million homes passed by 2028. The Metronet transaction, we see 6.5 million homes passed by 2030. There’s probably a couple more million in the wholesale partnerships we have so far.
So, that’s a pretty significant footprint that we put together. More importantly, we’ve chosen the best assets in the space. We’re very excited about this. Now, to the premise of your question, I think what people can see from our strategy are a number of things. One, our bias is pure play fiber, the simplicity and elegance of that model. It’s doing it with partners so that we can get more leverage on our equity dollars. It’s about best in class assets that are performing and growing like we’re seeing. We have some further appetite, but not much. I want to make that clear. I mean, these transactions that we have done get us millions of homes past and do it in a way that we think is really smart and positive for our shareholders. So, while we’re open-minded to things that fit this strategy, it would have to be the right deal.”
20. The Procter & Gamble Company (NYSE:PG)
Number of Hedge Fund Holders In Q2 2024: 64
Average Analyst EPS % Revision: -0.5%
The Procter & Gamble Company (NYSE:PG) is one of the biggest consumer goods companies in the world. It serves consumers all over the world through a portfolio of more than 80 brands which include well known ones such as Gillette and Oral-B. Its global presence and sizeable portfolio have enabled The Procter & Gamble Company (NYSE:PG) to develop a fortress balance sheet as evidenced by cash and equivalents of $9.5 billion. The Procter & Gamble Company (NYSE:PG)’s biggest business divisions in terms of revenue are its home care and fabric businesses. During the 2024 fiscal year, the division generated $29.5 billion in revenue which accounted for 37% of The Procter & Gamble Company (NYSE:PG)’s revenue. Overall, the company’s revenue during fiscal years 2022, 2023, and 2024 was $80 billion, $82 billion, and $84 billion. This shows that The Procter & Gamble Company (NYSE:PG) has managed to grow its revenue consistently in an economy that has been constrained by inflation. This has primarily come through price increases, but as inflation drops, further growth might prove evasive right when The Procter & Gamble Company (NYSE:PG)’s expenses have also grown.
The Procter & Gamble Company (NYSE:PG)’s management shared details for pricing and volume growth during the Q2 2024 earnings call:
“Moving onto fourth quarter results, organic sales rounded down to 2%, volume was up 2%, solid sequential progress. Pricing was up 1% and mix was in line with prior year. Growth continues to be broad-based across categories and regions.
Nine of 10 product categories grew or held organic sales in the quarter. Home care, hair care, grooming and oral care were each up high single digits, feminine care up low singles, skin and personal care, fabric care, personal health care and family care were each in line with prior year, and baby care was down mid singles. Five of seven regions grew organic sales with focus markets up 2% and enterprise markets up 2% for the quarter. Organic sales in North America grew 4% with four points of volume growth and price mix, in line with prior year. European focus markets organic sales were up 2% against a strong 12% comp in the base period. Volume was up 3%. Price mix was down a point as the region has now fully annualized prior year inflation-driven pricing.
Latin America organic sales were up 8%, including high singles growth in Brazil. Of note, Argentina’s overall contribution to organic sales for the region and the company were lower than the last two quarters due to the divestiture of a portion of the business in March and a notable decline in shipment volume for the remaining categories.”
19. Spotify Technology S.A. (NYSE:SPOT)
Number of Hedge Fund Holders In Q2 2024: 88
Average Analyst EPS % Revision: -0.5%
Spotify Technology S.A. (NYSE:SPOT) is a market leader in the global audio streaming industry which has grown in popularity through the internet. It grew its net users by 113 million in 2023, and more importantly, premium users by 31 million in 2023. The growth, coupled with the fact that higher discretionary spending boosts spending, has translated into positive catalysts for Spotify Technology S.A. (NYSE:SPOT)’s share price. Its stock is up 95% year to date and has gained 7% since the Fed announced its 50 basis point interest rate cut. The keys to Spotify Technology S.A. (NYSE:SPOT)’s hypothesis are its user growth, revenue per user, and its artist portfolio. The firm’s commanding position in the streaming industry, as evidenced by its 626 million user base, means that Spotify Technology S.A. (NYSE:SPOT) can easily attract musicians to its platform. It has been executing well on the revenue generation front, with the second quarter marking a 21% annual growth in premium revenue and a 15% growth in ad supported monthly active users driven by features such as longer videos that also run ads.
Baron Funds mentioned Spotify Technology S.A. (NYSE:SPOT) in its Q2 2024 investor letter. Here is what the firm said:
“Spotify Technology S.A. (NYSE:SPOT) is a leading global digital music service, offering on-demand audio streaming through paid premium subscriptions and an ad-supported model. Shares of Spotify were up, largely attributable to impressive beats in gross margin and operating margin as well as the announcement of subscription price hikes. Given the strong value proposition of the product, Spotify is beginning to exercise its pricing power following last year’s initial price increases that saw minimal churn. Users continue to grow at a healthy pace despite the pricing impact. Spotify also continues to innovate on the product side, with early trials of generative AI features and the addition of new verticals like audiobooks, which have seen solid early adoption. On the cost side, Spotify is on a path to structurally increase gross margins, aided by its high-margin artist promotions marketplace, increasing contribution by its podcast division, and growth of the margin-accretive advertising business. We still view Spotify as a long term winner in music streaming with potential to reach more than one billion monthly active users.”
18. M&T Bank Corporation (NYSE:MTB)
Number of Hedge Fund Holders In Q2 2024: 34
Average Analyst EPS % Revision: -0.3%
M&T Bank Corporation (NYSE:MTB) is a New York based regional bank. It is one of the biggest regional banks in the US, as evidenced by a sizeable asset base of $208 billion by the close of 2023. Just like other banks have, M&T Bank Corporation (NYSE:MTB) has also benefited from high interest rates as they have allowed it to grow its revenues. Between 2020 to 2023, the bank’s revenue grew by 57% as it jumped from $5.9 billion to $9.3 billion. However, there is some exposure in M&T Bank Corporation (NYSE:MTB)’s portfolio to the troubled commercial real estate sector. Work at home from trends coupled with high rates have led to sizeable defaults in this sector, and as of Q2 2024, M&T Bank Corporation (NYSE:MTB) had $31.5 billion in commercial real estate loans. Consequently, if macroeconomic data disappoints, then the shares could be stressed as corporate income statements are stressed during such times. On the flip side, reductions in interest rates will prove beneficial as they reduce the M&T Bank Corporation (NYSE:MTB)’s interest expense.
M&T Bank Corporation (NYSE:MTB)’s management commented on its interest expense and interest rates during the Q2 2024 earnings call:
“Higher for longer rates in the first half of the year allowed us to take additional actions to protect NII from lower interest rate environment.
For example, in the first half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward starting cash flow hedges, which became active in 2025. During — or further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts.”
17. Cummins Inc. (NYSE:CMI)
Number of Hedge Fund Holders In Q2 2024: 38
Average Analyst EPS % Revision: -0.2%
Cummins Inc. (NYSE:CMI) is one of the oldest industrial products companies in America. The firm has been in business since 1919. Cummins Inc. (NYSE:CMI)’s stock is up by 34% year to date and the shares soared to a new all time high of $323 in September. The share price performance is being driven by several catalysts. For instance, the firm believes that there is stable revenue growth for it in place as far ahead as in 2026. This is because new EPA laws are slated to go into effect in 2027, which has led management to believe that 2026 should see advanced buying by large fleet companies to enable them to take advantage of the current relaxed rules. However, Cummins Inc. (NYSE:CMI) can face some weakness in the heavy duty market which is slated to drop next year. Analysts expect the firm to earn $34.6 billion in revenue next year, and Cummins Inc. (NYSE:CMI) has also been positioning itself to become a key player in the clean fuel engine industry. The firm is focusing on clean diesel, hydrogen, and natural gas engines, which can create sizeable catalysts for it in the commercial vehicle industry. Cummins Inc. (NYSE:CMI)’s sizeable revenues, with trailing twelve month revenue sitting at $34 billion have also allowed it to be a dividend paying stock as the firm has been paying dividends for 54 years.
Cummins Inc. (NYSE:CMI)’s management shared details about some of these initiatives during the Q2 2024 earnings call:
“Also this quarter, we further progressed our partnership with Daimler Trucks and buses and PACCAR as we completed the formation of joint venture now known as Amplify Cell Technologies, to localize battery cell production in the in the battery supply chain the United States. This included naming the Chief Executive Officer of joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers’ evolving needs.
This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and as part of the appropriations related to the inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions, further showcasing our Destination Zero strategy in action. Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets.”
16. Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN)
Number of Hedge Fund Holders In Q2 2024: 57
Average Analyst EPS % Revision: -0.2%
Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) is a commercial stage and profitable biotechnology company. It generated $13.4 billion in revenue in the trailing twelve months and was profitable as well courtesy of its $4.3 billion in profits over the same period. This makes the stock relatively stable when compared to riskier biotech companies, and Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN)’s shares are up by 16% year to date. The firm’s hypothesis depends on sales of commercialized treatments such as Eylea. During the first and second quarters, the high dose variant of the drug’s sales were $200 million and $304 million, respectively. This drug is key to Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN)’s hypothesis as sales of the standard Eylea dropped during Q1 and were relatively flat during Q2. Additionally, the stock dropped by more than 4% in September after Amgen secured a court ruling in favor of its Eylea biosimilar. However, over the long term, Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN)’s robust pipeline of COPD, hives, small cell lung cancer, and allergy treatments can inject more life into the stock.
Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN’s management shared details about its pipeline during the Q2 2024 earnings call:
“In June, the European Commission approved DUPIXENT for COPD in patients with raised blood eosinophils, marking the first global regulatory approval for DUPIXENT in COPD. This approval enables DUPIXENT to address the approximately 220,000 eosinophilic COPD patients in the EU that are currently uncontrolled on maximum and eligible therapy. The approval also represents the first biologic approved to treat this disease.
We continue to work with the FDA regarding its ongoing review for this indication and expect their decision by the September 27 PDUFA date. We and our partner, Sanofi, are prepared for US launch that many pulmonologists, respiratory key opinion leaders and their patients have been eagerly anticipating. There is a high unmet need in COPD with Type 2 inflammation with approximately 300,000 eligible patients in the United States and our potential launch represents a significant driver for DUPIXENT’s continued growth. LIBTAYO global net product sales were $297 million in the second quarter, an increase of 43% on a constant currency basis. Despite intense competition, LIBTAYO has maintained its leadership position in non-melanoma skin cancers, while making impressive inroads in non-small cell lung cancer.”
15. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders In Q2 2024: 219
Average Analyst EPS % Revision: 0.2%
Meta Platforms, Inc. (NASDAQ:META) is one of the biggest social media companies in the world. As of March, the firm had 3.2 billion people using its platform. This provides Meta Platforms, Inc. (NASDAQ:META) with a sizeable moat as the firm is able to woo advertisers to its platform. In fact, advertising is the firm’s bread and butter as it accounted for $74 billion out of its $75 billion in revenue for the first half of 2024. Meta Platforms, Inc. (NASDAQ:META)’s sizeable resources, as evidenced by its $32 billion in cash and equivalents have also allowed it to invest heavily into artificial intelligence. It is among the handful of companies that have access to foundational AI models, allowing it to build a portfolio of AI products and services. Meta Platforms, Inc. (NASDAQ:META) is offering these to its advertisers and to its social media users, and given the billions it has spent on AI, monetization and profit from these services will prove to be a key driver of the social media company’s hypothesis.
Evercore’s Mark Mahaney is quite optimistic about Meta Platforms, Inc. (NASDAQ:META)’s ability to monetize AI. Here’s what he had to say during a recent talk with CNBC:
“If you look at what happened with Meta Platforms Inc (NASDAQ:META). they went to almost 30% revenue growth, they are growing dollar-wise faster than anybody else that’s because they used AI to rebuild their ad-tech stack because they used AI to rebuild their user interface and get us more engaged, so it actually worked for them.”
14. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders In Q2 2024: 117
Average Analyst EPS % Revision: 0.4%
Salesforce, Inc. (NYSE:CRM) is a software as a service (SaaS) firm that provides customer relationship management software. The firm was the biggest CRM software provider in the industry in 2023 as it commanded a 21.7% market share. Consequently, Salesforce, Inc. (NYSE:CRM)’s hypothesis is geared toward retaining market share and cost control as opposed to growth. Within the SaaS industry, the advent of AI has also seen investors shun firms that have not integrated the new technology into their operations. However, Salesforce, Inc. (NYSE:CRM) is not one of these companies, as its Data Cloud platform offers 8 trillion data points to enable customers to use AI to run their customer campaigns. Salesforce, Inc. (NYSE:CRM) also benefits from its sizeable market presence by managing 250 petabytes of data. Data is oil for the AI industry, and its resources provide Salesforce, Inc. (NYSE:CRM) a leg up in developing AI products. Yet, recurring revenue is another key variable for SaaS firms, and the company’s inability to grow its deal size could create headwinds.
Salesforce, Inc. (NYSE:CRM)’s management believes that Data Cloud can help it land big deals. Here’s what it said during the Q1 2025 earnings call:
“Data Cloud gives every company a single source of truth and you can securely power AI insights and actions across the entire Customer 360.
Now let me tell you why I’m excited about Data Cloud and why it’s transforming our customers and how it’s preparing them for this next generation of artificial intelligence. Data Cloud was included in 25% of our $1 million plus deals in the quarter. We added more than 1,000 data cloud customers for the second quarter in a row. 8 trillion records were ingested in the Data Cloud in the quarter, up 42% year-over-year and we processed 2 quadrillion records, that’s a 217% increase compared to last year. Over 1 trillion activations drove customer engagement, which is a 33% increase year-over-year. This incredible growth of data in our system and the level of transactions that we’re able to deliver, not just in the core system but especially in data cloud is preparing our customers for this next generation of AI.”
13. Eastman Chemical Company (NYSE:EMN)
Number of Hedge Fund Holders In Q2 2024: 28
Average Analyst EPS % Revision: 0.5%
Eastman Chemical Company (NYSE:EMN) is a diversified chemical company that caters to the needs of construction, aviation, pharmaceutical, aviation, agriculture, and other industries. The industrial focus of its business means that it is exposed to economic headwinds that slow down industrial production. Consequently, Eastman Chemical Company (NYSE:EMN)’s shares are up by a modest 25% year to date, with 11 percentage points of these gains having come in September. In fact, September has been a great month for Eastman Chemical Company (NYSE:EMN)’s shares with the stock having gained 9%. The chemical company benefits from a low rate environment that increases industrial output, and Eastman Chemical Company (NYSE:EMN)’s hypothesis is also dependent on its ability to spur polyester recycling. The firm has opened a new plant for this in Tennessee, and another facility in Texas is expected to help big ticket firms like Pepsi meet their recycled materials needs. Additionally, since a slow industrial economy has led to inventory buildups over the past few quarters, Eastman Chemical Company (NYSE:EMN) is likely to benefit from higher de stocking and inventory replenishment moving forward.
Eastman Chemical Company (NYSE:EMN)’s management commented on industry inventory levels during the Q2 2024 earnings call. Here is what they said:
“So when you look at sort of where we are with the Tritan market, a lot of that goes in consumer durables as everyone I think in the industry has called out that market’s been weak. It continues to be weak. But we did see a significant amount of return in volume with the end of destocking. So a huge amount of the hit that we took in 2023 was associated with destocking. That volume has come back and the very high margins that go with it are certainly very helpful this year and will be going forward. We also continue to have a lot of wins just on the traditional value proposition of Tritan. So when you look at the compelling attributes of its heat resistance, its chemical resistance, its clarity, it being a safe product that’s BPA free.
We’ve always had a lot of volume wins in applications that’s driven tremendous growth in this product area for over a decade. That engine’s back in gear this year. We’re winning on those value propositions a variety of places on top of end of destocking that’s giving us good momentum. And then on top of that, we’re now layering on recycled content. And for a lot of brands, that’s really important. We have a lot of customers that have been with us for a long time that are using this recycled content claim as a way to enhance their product offering or drive new volume growth like P&G, NowGene, [indiscernible], LVMH, and L’Oreal, Estee Lauder, etc. You’ve seen the icon chart of all the customers we’ve had who are using in one form or another. And then we’ve — what’s really exciting is also opening up new markets for us to serve that wouldn’t have originally been available for our value proposition.”
12. East West Bancorp, Inc. (NASDAQ:EWBC)
Number of Hedge Fund Holders In Q2 2024: 27
Average Analyst EPS % Revision: 0.5%
East West Bancorp, Inc. (NASDAQ:EWBC) is a regional bank that is primarily a mega lender. This is because as of H1 2024, 84% of the bank’s interest and dividend income came through loans receivable. As a result, East West Bancorp, Inc. (NASDAQ:EWBC) shares are particularly sensitive to interest rates. For instance, during the bank’s fiscal Q2, its 49% profit margin dropped by 6 percentage points over the year ago quarter’s 55%. This also drove net income down 7.6% to $288 million. Consequently, post earnings, the stock dipped by 12.6% over the next couple of days. Looking at East West Bancorp, Inc. (NASDAQ:EWBC) loan portfolio, $37 billion out of $52 billion of loans are made to the commercial sector. While these loans are typically more robust when facing inflationary pressure, out of the $37 billion, $20 billion are in commercial real estate. As a result, East West Bancorp, Inc. (NASDAQ:EWBC) is vulnerable to economic downturns that could increase defaults. Additionally, high interest costs have also constrained the bank’s ability to make new loans, and when management disclosed this in September, East West Bancorp, Inc. (NASDAQ:EWBC)’s shares dropped by 6% over the next week.
During the Q2 2024 earnings call, East West Bancorp, Inc. (NASDAQ:EWBC)’s management provided important details about its commercial real estate portfolio:
“With regards to commercial real estate loan maturities, as of June 30, 2024, 5% of outstanding balances are scheduled to mature by the end of 2024 and 10% of outstanding balances will mature in 2025. For office loans specifically, 8% of outstanding balances will mature in 2024 and 16% will mature in 2025. We remain vigilant and proactive in managing our credit risk. Based on what we know today we continue to expect quarterly net charge-offs to be in the range of 15 basis points to 25 basis points for the foreseeable future.
Turning to Slide 9, the total allowance for loan losses increased $14 million quarter-over-quarter, driven by the expected economic outlook and also loan growth during the quarter, resulting in allowance for loan losses coverage ratio of 1.30%. Within commercial real estate, we increased the reserve for office loans by $7 million, bringing the total coverage ratio to 3.10% of office loans. We believe our loan portfolio is appropriately reserved as of June 30, 2024.”
11. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders In Q2 2024: 184
Average Analyst EPS % Revision: 0.6%
Apple Inc. (NASDAQ:AAPL) is a dominating player in the global consumer electronics industry. The firm derives 52% of its revenue from the iPhone lineup, which makes smartphones a key part of its hypothesis. Apple Inc. (NASDAQ:AAPL)’s market value of $3.46 trillion, making it the most valuable company in the world, is built on the iPhone’s brand loyalty and based on belief surrounding the firm’s superior product design, manufacturing, and marketing practices. Consequently, any weakness in iPhone sales also tends to impact the share price. As an example, Apple Inc. (NASDAQ:AAPL)’s shares slid by nearly 3% in mid September after TF Securities’ well known iPhone analyst Ming-Chi Kuo noted that the first weekend sales of the latest iPhone 16 lineup were 12% lower than the year ago comparable figures for the iPhone 15. However, he added that the iPhone 16’s key differentiating factor, Apple Intelligence, was not available at launch. This suggests that if the analyst is correct, then the feature’s introduction could prove to be a catalyst to the sales and consequently, Apple Inc. (NASDAQ:AAPL)’s stock.
Baron Funds mentioned Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter. Here is what the firm said:
“Recent Activity This quarter we re-initiated a position in Apple Inc., a leading technology company known for its innovative consumer electronics products like the iPhone, MacBook, iPad, and Apple Watch. Apple is a leader across its categories and geographies, with a growing installed base that now exceeds 2 billion devices globally. The company’s attached services – including the App Store, iCloud, Apple TV+, Apple Music, and Apple Pay – provide a higher margin, recurring revenue stream that both enhances the value proposition for its hardware products and improves the financial profile. Apple now has well over 1 billion subscribers paying for these services, more than double the number it had just 4 years ago. The increasing services mix has led to healthy operating margin improvement, providing more free cash flow for Apple to reinvest in the business and to distribute to shareholders. Throughout its 48-year history, Apple has successfully navigated and capitalized on major technological shis, from PCs to mobile to cloud computing. We believe the company’s leading brand and device ecosystem position it to do equally well in the AI age, and this was the driver of our decision to re-invest. “Apple Intelligence” – the AI strategy unveiled at Apple’s recent Worldwide Developer Conference – leverages on- device AI and integrations with tools like ChatGPT to enhance user experiences across its ecosystem. The AI suite enables users to create new images, summarize and generate text, and use Siri to perform actions across their mobile applications, all while maintaining user privacy and security. We think Apple Intelligence can drive accelerated product upgrade cycles and higher demand for Apple services. The combination of growth re-acceleration, increasing services contribution, and thoughtful capital allocation should continue driving long-term shareholder value.”
10. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Holders In Q2 2024: 83
Average Analyst EPS % Revision: 0.8%
Wells Fargo & Company (NYSE:WFC) is one of the biggest banks in the US. While other diversified banks have global exposure, WFC is known for its strong presence in the US domestic market. This is evidenced by the fact that $14.1 billion of Wells Fargo & Company (NYSE:WFC)’s $24.1 billion of H1 2024 net interest income comes via retail banking. Like other sizeable banks, it also benefits from interest rate cuts. This is because lower rates reduce interest expense, and it has already been reflected in Wells Fargo & Company (NYSE:WFC)’s Q3 guidance. The firm increased its net interest income guidance drop to a low end of 8% from an earlier 7% for the full year and the need for lower rates was also reflected in the bank’s shares gaining 3.7% during the remaining week after the Fed announced its highly anticipated 50 basis point interest rate cut. However, Wells Fargo & Company (NYSE:WFC)’s shares have been flat since then after regulators restricted its ability to do business after determining weak money laundering controls. The bank also has a sizeable investment division, which could see tailwinds in a low rate environment provided the economy remains robust.
Wells Fargo & Company (NYSE:WFC)’s management commented on its investment arm during the Q2 2024 earnings call:
“We have been methodically growing our corporate investment bank, which has been a priority and continues to be a significant opportunity for us. We are executing on a multi-year investment plan while maintaining our strong risk discipline and our positive momentum continues. We have added significant talent over the past several years and we’ll continue to do so in targeted areas where we see opportunities for growth. Fernando Rivas recently joined Wells Fargo as Co-CEO of Corporate Investment Banking. Fernando has deep knowledge of our industry and his background and skills complement the terrific team Jon Weiss has put together. While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we’ve already seen with strong growth in investment banking fees during the first half of the year.
In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth. In the commercial Bank, we are focused on growing our treasury management business, adding bankers to cover segments where we are underpenetrated, and delivering our investment banking and markets capabilities to clients and believe we have significant opportunities in the years ahead.”
9. Arch Capital Group Ltd. (NASDAQ:ACGL)
Number of Hedge Fund Holders In Q2 2024: 37
Average Analyst EPS % Revision: 1.2%
Arch Capital Group Ltd. (NASDAQ:ACGL) is a diversified insurance company that offers property and casualty, health, worker compensation, automobile, and other products. The firm also has a presence in the reinsurance and mortgage insurance markets. A key differentiating factor for Arch Capital Group Ltd. (NASDAQ:ACGL) when compared to most other insurance companies is its underwriting cycle analysis tool called the Insurance Clock. Through this, it links its return on investment with the different stages of the economy, starting from insolvencies when reinsurance demand picks up and prices start to drop and ending at euphoria, where prices peak and businesses start to grow. This model has enabled Arch Capital Group Ltd. (NASDAQ:ACGL) to manage a tough insurance market quite well. Even though insurance providers have struggled to deal with the rising number of climate related catastrophes and a broader slowdown in the auto industry, Arch Capital Group Ltd. (NASDAQ:ACGL)’s Q2 2024 combined ratio was 78.7%. This marked a 1.1 percentage point over the year ago quarter, and a lower ratio indicates greater efficiency. Additionally, lower rates should provide a nice catalyst for the firm’s mortgage insurance business along with an expected uptick in the reinsurance market in 2025.
Artisan Partners mentioned Arch Capital Group Ltd. (NASDAQ:ACGL) in its Q2 2024 investor letter. Here is what the fund said:
“Arch Capital Group Ltd. (NASDAQ:ACGL), a global reinsurer, has experienced strong growth over the past year as reinsurance markets have been in an upswing in terms of pricing and premium growth, while rising interest rates boosted net interest income. Additionally, margins benefited from lower acquisition costs, better expense management and reduced catastrophe losses. In its mortgage insurance business, high interest rates are a headwind to top-line growth but a tailwind for margins. Arch is an industry leader capably managed by a long-tenured team that has achieved an enviable underwriting record while at the same time seeking opportunistic growth. It has shown discipline in pulling back from writing business when pricing is soft, patiently waiting for turns in the cycle to put its strong capital position to work.”
8. Atmos Energy Corporation (NYSE:ATO)
Number of Hedge Fund Holders In Q2 2024: 18
Average Analyst EPS % Revision: 1.3%
Atmos Energy Corporation (NYSE:ATO) is a sizeable Texas based natural gas utility that caters to the needs of more than 3 million customers. It is a regulated utility, which means that the firm is able to withstand periods of weak natural gas prices courtesy of return of equity rates that are predetermined. This has proven to be quite important in today’s weak natural gas market, with Atmos Energy Corporation (NYSE:ATO)’s shares up 18.6% year to date and 19% since July start. The utility has also benefited from its strong pipeline infrastructure, which ironically, has seen pipeline companies experience stronger demand for their infrastructure due to high US natural gas production which has depressed gas prices. In essence, Atmos Energy Corporation (NYSE:ATO)’s tariffs and pipeline have enabled it to access the best of both worlds in a tough gas market. Moving forward, potential catalysts can include pipeline expansion and favorable rates, while the shares can retreat in case of regulatory headwinds and lower natural gas production.
During the Q2 2024 earnings call, here’s what Atmos Energy Corporation (NYSE:ATO)’s management had to say about the rest of the year:
“All regulatory outcomes that can impact fiscal ’24 has been implemented. As I mentioned ago, we anticipate spreads for APTs through system business will remain elevated, which will modestly contribute to our Q4 results. And we have a reasonably clear line of sight and consistent compliance, maintenance, and monitoring we will be performing in the fourth quarter. As a reminder, our guidance range includes two items totaling $0.17 that we will exclude when we initiate our ’25 guidance in November. The first item is the Texas property tax benefit that we have been discussing all fiscal year, which should favorably impact fiscal ’24 results by $0.10. Additionally, the one-time Mississippi Fed debt adjustment for represented $0.07.”
7. Welltower Inc. (NYSE:WELL)
Number of Hedge Fund Holders In Q2 2024: 32
Average Analyst EPS % Revision: 2.7%
Welltower Inc. (NYSE:WELL) is a specialty real estate investment trust that invests in healthcare properties. The firm’s portfolio includes senior housing, rehabilitation centers, and other facilities. In a real estate sector plagued by high interest rates, Welltower Inc. (NYSE:WELL)’s shares are a standout as they have gained 42% year to date. This has come on the back of strong financial performance. As of H1 2024, $2.8 billion of the REIT’s $3.7 billion in revenue came from its resident fees and services to seniors in its facilities. Crucially, the $2.8 billion figure marked a 22% annual growth over the year ago figures, indicating that Welltower Inc. (NYSE:WELL) is growing its senior care business. Population dynamics are expected to play an important role in the firm’s fortunes as an aging population coupled with a strong market position enable Welltower Inc. (NYSE:WELL) to grow in the future. Morgan Stanley believes that the company’s occupancy rate can touch 87% by 2025 end to drive net income growth.
Baron Funds mentioned Welltower Inc. (NYSE:WELL) in its Q2 2024 investor letter. Here is what the fund said:
“The shares of Welltower Inc. (NYSE:WELL) continued to perform well in the second quarter. Share price appreciation was driven by continued strong cash flow growth in its senior housing portfolio driven by strong occupancy and rent growth, solid execution on its highly accretive proprietarily sourced capital deployment opportunities, and an improved full-year growth outlook.
Welltower is a REIT that is an operator of senior housing, life science, and medical office real estate properties. We recently met with the entire Welltower senior management team and remain encouraged that the shares can continue to be a strong multi-year contributor for the Fund. We are optimistic about the prospects for both cyclical growth (a recovery from depressed occupancy levels following COVID-19) and secular growth (the senior portion of the population is the fastest growing portion of the population and people are living longer) in senior housing demand against a backdrop of muted supply that will lead to several years of compelling organic growth. Welltower is a “best-in-class” operator with a high-quality curated portfolio that is led by astute capital allocators, thereby allowing it to capture outsized organic and inorganic growth opportunities.”
6. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders In Q2 2024: 179
Average Analyst EPS % Revision: 4.2%
NVIDIA Corporation (NASDAQ:NVDA) is the GPU designer that has led the surge in Wall Street surrounding artificial intelligence. Its GPUs are the mainstay of the AI industry, as they are the most advanced in the world for computing AI workloads. Additionally, another key to NVIDIA Corporation (NASDAQ:NVDA)’s meteoric rise is its GPUs’ ability to power accelerated computing which enables heavy duty non AI workloads to be processed faster despite the physical limitations of CPU manufacturing. NVIDIA Corporation (NASDAQ:NVDA) also allows GPU users the ability to control their chips to a greater extent through CUDA, and its success depends on maintaining market dominance. As long as NVIDIA Corporation (NASDAQ:NVDA)’s GPUs are needed by most companies, and no viable rivals or alternatives exist, the firm can continue to grow. Morgan Stanley believes that the firm is capable of generating $10 billion in revenue in Q4 alone courtesy of its Blackwell GPUs due to strong competitive advantages.
Baron Funds mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the fund said:
“More recently, however, we’ve entered the period of doubts and questioning, some of which is real and normal in the first stages of a new paradigm, and some of which is prompted by short sellers. Given the explosive returns of NVIDIA and other AI leaders, AI bears and fear mongers have been comparing the current AI market winners with the internet bubble of the late 1990s/early 2000s, and NVIDIA’s stock move today with Cisco’s back then. First, while many stocks were trading at nosebleed valuations and on made up metrics (such as price per eyeballs) before the bursting of the internet bubble, as we’ve said many times, the internet proved to transform our world and create the digital age we are now living in. Second, while NVIDIA’s stock price inflection has been nothing short of unprecedented for a company of its size, it was fueled almost entirely by explosive growth in revenues, earnings, and cash flows– not multiple expansion. Over the last 12 months, NVIDIA’s stock has effectively tripled, but its forward P/E multiple has remained essentially flat, because NVIDIA blew away Wall Street expectations despite being covered by over 60 sell-side analysts, who have increased their forward projections every single quarter. In my career, the only comparative analogue is when Apple first introduced the iPhone and stunned Wall Street with its growth. In contrast, most of Cisco’s move in the late 1990s was due to multiple expansion. At its peak, Cisco traded at a P/E ratio over 130 times, more than quadruple its five-year average of 37 times. At the end of the second quarter, NVIDIA traded at a P/E ratio of 40 times, equal to its five-year average, and at a P/E to growth (or PEG) ratio for 2025 of 0.8 times, as consensus expectations are for NVIDIA to grow earnings per share 40% next year.
Moreover, investor concerns have arisen about the financial impact AI is having and whether surging capital expenditures (capex) across the technology landscape, particularly the large cloud players (Microso, Google, Amazon, and Meta), known as the hyperscalers, will be justified and earn reasonable returns on invested capital (ROIC). First, the adoption and penetration of new technology typically traces a classic S-curve–or more precisely, in our view, a series of S-curves or phases. For at least the past year and a half, we’ve been in what might be called the AI infrastructure- build phase – building the AI factories, as NVIDIA CEO Jensen Huang has articulated it, and this phase has been dominated by the infrastructure- layer players – the accelerated computing chips suppliers like NVIDIA and Broadcom, as well as data center, cloud infrastructure and energy companies. The hyperscalers, other enterprises, and sovereign entities investing ahead understand that if you want to be in the AI game, you must invest now – build the infrastructure, build the factories – or else you’ll find yourselves disrupted on the sidelines or playing catch up in the biggest game, the most important race in a technology generation. Only those who invest today even have the chance to be the winners of the future.”
5. Hasbro, Inc. (NASDAQ:HAS)
Number of Hedge Fund Holders In Q2 2024: 27
Average Analyst EPS % Revision: 5%
Hasbro, Inc. (NASDAQ:HAS) is a toy and games company that targets children. It owns some of the most well known games and brands in the world such as Monopoly and Nerf. Its brands provide Hasbro, Inc. (NASDAQ:HAS) a key advantage in a relatively undifferentiated industry otherwise. To maintain its competitive advantage, the toy company has to regularly introduce new products and brands. On this front, one recent announcement from Hasbro, Inc. (NASDAQ:HAS) has been Magic: The Gathering, which is a new card game. Data shows that early adoption of the game has been high, with simpler rules encouraging first time players. Additionally, another key catalyst for Hasbro, Inc. (NASDAQ:HAS) can be the digitization of its existing brands. One such attempt has been Monopoly Go, which enables users to play the popular game online. Consequently, strong new brand performance and digitization can lead to tailwinds for Hasbro, Inc. (NASDAQ:HAS)’s shares.
ClearBridge Investments mentioned Hasbro, Inc. (NASDAQ:HAS) in its Q4 2023 investor letter. Here is what the firm said:
”Hasbro, which owns global entertainment brands such as Monopoly, My Little Pony and Nerf, has struggled over the past few quarters due to lackluster demand for toys and games in favor of other forms of digital entertainment. Persistent underperformance has undermined our optimism over the company’s legacy businesses, and ultimately led us to exit the stock.”
4. The Allstate Corporation (NYSE:ALL)
Number of Hedge Fund Holders In Q2 2024: 61
Average Analyst EPS % Revision: 5.9%
The Allstate Corporation (NYSE:ALL) is the fourth biggest auto and homeowner insurance company in America in terms of market share. This provides it with a sizeable asset base that ensures stability during turmoil along with a wide customer base to which it can cross sell products too. However, the homeowner insurance market is facing quite a bit of turmoil due to climate catastrophes which have forced several insurance companies either out of business or to exit markets such as Florida. The Allstate Corporation (NYSE:ALL)’s shares are up by 32% year to date, as the firm has been helped by milder weather and efforts to grow its customer base. Additionally, the firm is selling its employee benefits division which will further free up roughly $1.5 billion in capital to allow it to focus on other initiatives. Since The Allstate Corporation (NYSE:ALL) has been able to increase premiums by quite a bit lately, if it manages to lower costs, then margins could grow and lead to share tailwinds.
Ariel Investments mentioned The Allstate Corporation (NYSE:ALL) in its Q2 2024 investor letter. Here is what the fund said:
“We added property and casualty insurer, Allstate Corporation. A challenging macro-environment, inflation and lower reserve development led to significant underwriting losses across key markets, presenting us with an attractive entry point. Looking ahead, we expect the strong pricing environment, coupled with lower inflationary pressure and future premium growth to yield upside for shares. Additionally, management is committed to improving its adjusted expense ratio and recently made upgrades to its claims handling processes to minimize loss development and lower claim severities.”
3. Burlington Stores, Inc. (NYSE:BURL)
Number of Hedge Fund Holders In Q2 2024: 42
Average Analyst EPS % Revision: 13.2%
Burlington Stores, Inc. (NYSE:BURL) is an off price retailer headquartered in Burlington, New Jersey. The firm’s shares are up by 32% year to date, with the growth coming on the back of a 21% jump at the tail end of May following its first quarter earnings. Burlington Stores, Inc. (NYSE:BURL)’s shares soared because the firm managed to heftily grow its margins in Q1. Margins are a key part of any retailer’s hypothesis, as they indicate business efficiency and operational advantages for companies that can sell products only for a small premium over their cost. During Q1, Burlington Stores, Inc. (NYSE:BURL)’s Merchandise margins jumped by 90 basis points while the gross margin grew by 1.2 percentage points. Simultaneously, the firm’s revenue jumped by 11% to $2.36 billion while the margin improvements and other benefits led its net income to more than double to $78.5 million. The margin improvements are important for Burlington Stores, Inc. (NYSE:BURL) as they are part of its strategy to optimize the supply chain. It followed up with strong margins performance in Q2 when gross margins jumped by 1.1% and surpassed analyst estimates by 0.3 percentage points.
During the Q2 2024 earnings call, Burlington Stores, Inc. (NYSE:BURL)’s management provided vital details for its supply chain efficiencies:
“We continue to be pleased by the faster-than-expected progress we’re making in driving productivity gains and cost savings in supply chain. As we shared in the prepared remarks, supply chain leveraged 60 basis points in Q2. And this was despite the start-up of a new distribution center in the second quarter and the receipt shift that we talked about from Q1 into Q2, we referenced this on last quarter’s call. We do have a number of productivity initiatives. These are more within the four wall process improvements that streamline our DC operations, reduce touches, reduce steps, reduce time to process and ultimately save labor dollars in the DC, and we’re harvesting these savings a little bit faster than we’d originally planned.
On previous calls, we had described supply chain productivity improvement as driving potentially 100 basis points of the 400 basis points of margin improvement we laid out last year in our long-range model. And we’ll see how the rest of this year plays out, but expect supply chain to continue to drive leverage in the back half. And in getting to the second part of your question, longer term, probably beyond the long-range model we’ve laid out, we do have an opportunity to drive incremental leverage as we modernize our supply chain with new larger, much more automated DCs that we expect to open. As I mentioned, we recently opened a new DC this year and we have another much larger DC under construction, which we expect to open in 2026. And with these new DCs, we have an opportunity to design DCs for off-price and with much, much more automation.”
2. MongoDB, Inc. (NASDAQ:MDB)
Number of Hedge Fund Holders In Q2 2024: 54
Average Analyst EPS % Revision: 13.3%
MongoDB, Inc. (NASDAQ:MDB) is a software as a service (SaaS) company that operates in the cloud database market. This places the firm right in the center of an important sector in the SaaS industry as data will drive the AI era. MongoDB, Inc. (NASDAQ:MDB)’s shares are down 27% year to date, on the back of a massive 29% drop in the tail end of May. This was because of the two key drivers of SaaS valuation, namely cost control and revenue growth. While MongoDB, Inc. (NASDAQ:MDB)’s Q1 results saw its revenue of $450.6 million grow 22% and beat analyst estimates of $439.7 million, the shares fell as the company guided Q2 revenue at a $462 million midpoint and earnings at $0.47. These undershot analyst estimates of $470 million in revenue and $0.58 in EPS. MongoDB, Inc. (NASDAQ:MDB)’s full year revenue guidance also only projected a 12% annual growth, which was a marked slowdown over previous years’ growth of 57%. Consequently, investors weren’t impressed. However, the firm has key differentiators, particularly through its presence in the noSQL market and the Atlas platform which grew by 30% during Q2. MongoDB, Inc. (NASDAQ:MDB)’s Q2 results also beat revenue growth estimates of 9% through 13% growth. Looking ahead, a significant growth in annual revenues can prove to be a sizeable catalyst.
MongoDB, Inc. (NASDAQ:MDB)’s management commented on its growth during the Q2 2024 earnings call:
“Starting with consumption of existing applications on our platform, this is where we have historically seen a macro impact as usage of applications is impacted by the underlying business conditions of our customers. As we discussed on our last earnings call, in Q1, we did see broad-based consumption growth slowdown, suggesting some macro softening. Our usage trends suggest a similar macro-environment in Q2 as in Q1, even though Q2 Atlas consumption growth was modestly ahead of our expectations. Moving on to new business, we generally have not seen the macro-environment impact our ability to win new business, and that was true in Q2 as well.”
1. The Progressive Corporation (NYSE:PGR)
Number of Hedge Fund Holders In Q2 2024: 89
Average Analyst EPS % Revision: 26.4%
The Progressive Corporation (NYSE:PGR) is a sizeable American insurance company. It operates in both homeowner and auto insurance industries. The firm’s hypothesis depends on its expense ratio, premium growth, and investment income since these are the key drivers of any insurance company. On these fronts, The Progressive Corporation (NYSE:PGR) is experiencing positive growth for its policies in force of the auto insurance division. At the same time, the expense ratio is also growing as the insurance company is increasing its marketing spend to grow its personal insurance division. Additionally, lower interest rates mean that the money The Progressive Corporation (NYSE:PGR) has invested in securities yields lesser returns which stresses its investment income. Consequently, the company might have to increase premiums in the future to make up for this drop. However, The Progressive Corporation (NYSE:PGR)’s strong auto insurance growth could create tailwinds for the stock.
Artisan Partners mentioned The Progressive Corporation (NYSE:PGR) in its Q1 2024 investor letter. Here is what the fund said:
“Progressive Insurance shares rose 30% during the quarter. After a difficult start to 2023, the company quickly adapted and finished the year with impressive growth in premiums and underwriting profits. In Q4 2023, it managed to grow its customer base even as it raised rates and improved its underwriting ratios—a trifecta that isn’t often seen in the insurance industry. This performance has continued, which should set the stage for another year of good results in 2024. Perhaps most importantly, it has been able to navigate the environment far better than its peers, many of whom are still reporting sub-par underwriting performance. Progressive has consistently gained market share in the personal auto market over our ownership period and now commands close to 15% of the total market. Its shares are no longer a bargain, but we continue to hold them due to the high quality of this business and the advantaged nature of its low-cost insurance franchise.”
PGR is one of the top MS Overweight stocks to buy. But our conviction lies in the belief that some 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 PGR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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