In this piece, we’ll take a look at the best stocks in the era of AI, growth, and low interest rates according to investment bank UBS.
The stock market at the tail end of 2024 is an evolution of the patterns we’ve observed since the start of the coronavirus pandemic. Back then, technology stocks soared as the demand for tech products rose due to lockdowns and stay-at-home restrictions. Then, as inflation soared and central banks ratcheted up interest rates to tamp it down, the markets tumbled as investors flooded into safe-haven assets and money market securities. Worries of a recession also drove some of the market’s pessimism, with investment banks, economists, and analysts predicting that the economy could experience a sharp downturn.
Now, as we get ready to welcome 2025, technology and macroeconomic concerns are still driving the market. Since technology is far more interesting and information-heavy, starting with macro is better. On this front, September was a pivotal month for indexes as it finally saw the Federal Reserve deliver a 50 basis point interest rate cut to bring rates down from a 24-year high. Since the interest rate cut, the flagship S&P index, the broader NASDAQ, and the tech-heavy NASDAQ are up by 3.48%, 5.89%, and 5.39%, respectively. This optimism is driven by lighter financing requirements allowing businesses to pursue growth and easing worries of a tight labor market and a potential economic downturn which were at the root of poor market performance on the day the rate cut was made.
However, just because the economic clouds might have dissipated doesn’t mean they’ve dissolved. The start of October’s final week saw some turbulence across major US stock indexes. The Dow, the flagship S&P, and the broader NASDAQ shed 0.96%, 0.92%, and 1.60%, respectively as investors worried that the Federal Reserve might not keep up the pace with interest rate cuts. The drop came on the back of rising Treasury yields, which typically soar if investors re-calibrate their rate estimates upwards as bonds with lower rates are sold. The turbulence followed after four Federal Reserve officials shared their thoughts on future cuts.
Their thoughts reflected a division in policymakers regarding the pace of interest rate cuts. The four officials are Kansas City Fed President Jeffrey Schmid, Dallas Fed President Lorie Logan, San Francisco Fed President Mary Daly, and Minneapolis Fed President Neel Kashkari. Logan cautioned that while she was willing to reduce rates, two takeaways from the current financial and economic picture were on her mind.
She shared that first “the economy is strong and stable. But second, meaningful uncertainties remain in the outlook. Downside risks to the labor market have increased, balanced against diminished but still real upside risks to inflation. And many of these risks are complex to assess and measure.” The Dallas Fed President added that “any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle.”
Fed’s Schmid followed a similar tune. He commented that any rate cuts should be carefully measured to ensure that the Fed did not misinterpret the economy’s reaction. Speaking in Kansas City, the Fed President commented “Outsized policy moves can provoke outsized financial market reactions to data surprises. The data are messy and subject to large revisions as we have seen in recent months. Our policy must be linked to the flow of data, but we should avoid putting too much weight on any single data point. As policymakers we should be flexible, but being nimble can come with a price. Reacting quickly builds expectations of further quick reactions.” Daly shared in a webcast that the current environment “is a very tight interest rate for an economy that already is on the path to 2% inflation, and I don’t want to see the labor market slow further,” while Kashkari stressed the data-dependent decision making at the Fed, with the central bank wanting “to keep the labor market strong and we want to get inflation back down to our 2% target.”
Naturally, investors were worried that the path to 50 basis point cuts for the rest of 2024 might not be so clear. However, even though rates might be high, the US economy continues to be the star performer globally. As per the IMF, the global economy is expected to grow by 3.2% in 2024 and 2025. This is the latest estimate in October, and the fact that it’s unchanged over the July estimate is solely due to the US. In its October report, the IMF revised US economic growth forecasts for 2024 and 2025 to 2.6% and 2.2%, while economies in the Middle East, Africa, and Central Asia saw downward revisions. Consequently, robust American economic growth made sure that the global estimates remained unchanged.
One major reason behind the bullishness surrounding America is artificial intelligence. Data from Carta shows that it’s not only Wall Street that’s bullish on AI. For the first three quarters of 2024, hardware and software as a service (SaaS) industries raised $7.62 billion and $18.43 billion in primary round startup investment, respectively. This marked 85% and 67% annual growth, and it signifies investors’ push towards technologies that facilitate artificial intelligence.
The data comes on the heels of the third quarter earnings season which is also seeing a paradigm shift for the AI industry. So far, investors have been focused on one AI company, the Santa Clara, California-based AI GPU designer whose shares are up 193% year to date. Yet, now, Wall Street is also interested in Phase 2 AI companies. These companies, according to investment bank Goldman Sachs, are those that provide AI infrastructure such as servers, semiconductor companies apart from the GPU designer, and utilities that will power up the gigawatt AI data centers that Silicon Valley has in mind for its AI models. For a detailed view of the latest in the AI industry, you can read Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks.
All these factors, from the economy to AI are also on the mind of investment bank UBS. In its latest Equity Compass note, the bank remained bullish on US stocks due to its perception of the current stock market and economic climate. “From a single stock perspective, we think many of the large U.S. tech companies offer appealing long-term upside, especially those that have leading positions in the AI value chain,” shared UBS. Shifting the focus to macroeconomics, it outlined “the combination of slowing but durable economic growth, healthy earnings growth, and continued Fed rate cuts are all supportive,” adding that while “economic growth is cooling, the labor market remains healthy. Initial claims for unemployment insurance are fairly low, there are more open jobs than unemployed people, and real wages are rising.”
The bank also identified AI as a ‘most attractive’ thematic investing opportunity. It shares that “The shift in computing infrastructure, from central processing units to accelerated computing units (GPUs), and in applications, from retrieval-based to generative-based architectures, has far-reaching implications for AI in terms of its generalizability (the ability to make predictions based on past observations) and effectiveness.” As for the potential catalysts, UBS adds that “The next catalysts we see include potential export controls imposed by the US on China in October and 3Q24 results, where we expect further positive revisions to AI infrastructure capex and more data points on AI adoption across industries.”
A large stock market board displaying the S&P 500 and S&P 500 Growth Index.
Our Methodology
To make our list of the top US stocks in the AI and growth environment, we first ranked the stock sectors in UBS’ Equity Compass report by the bank’s Neutral, Attractive, and Most Attractive rankings. Then, the stocks within these categories were ranked by the number of hedge funds that had bought the shares in Q2 2024. The list starts from Neutral and ends at Most Attractive, and the sectors themselves were ranked by the total number of hedge fund investors in the component stocks.
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).
29. Colgate-Palmolive Company (NYSE:CL)
Number of Hedge Fund Investors In Q2 2024: 52
UBS’ Sector Rating: Neutral
Sector: Consumer Staples
Colgate-Palmolive Company (NYSE:CL) is one of the biggest consumer goods companies in the world. It primarily makes and sells oral care products. The firm held 41% of the global toothpaste market share in 2023, providing it with a robust logistics network, the ability to drive volumes, and global brand recognition. Additionally, it also means that Colgate-Palmolive Company (NYSE:CL) can grow by either increasing volumes when prices are low or through high prices in an inflationary market. It also enjoys hefty gross margin benefits from its volume and brand presence. Compared to larger rival P&G, Colgate-Palmolive Company’s (NYSE:CL) gross margin is 59.7% which is nine percentage points higher than P&G’s. However, since its products provide it with little room for innovation, Colgate-Palmolive Company (NYSE:CL) has to contend with other strategies for growth. These include expanding into emerging markets and benefiting through a weaker US dollar.
ClearBridge Investments mentioned Colgate-Palmolive Company (NYSE:CL) in its Q2 2024 investor letter. Here is what the firm said:
“Colgate-Palmolive, added to the portfolio in 2023, started outperforming materially toward the tail end of last year as growth, margin and market share momentum began to turn favorably, and that momentum has continued year to date as the stock has nicely outperformed the large cap staples group. The fundamental upside has been driven by a combination of healthy organic growth (with positive volumes), good gross margin progression, and strong re-investment spending supporting market share gains and future growth.”
28. The Coca-Cola Company (NYSE:KO)
Number of Hedge Fund Investors In Q2 2024: 68
UBS’ Sector Rating: Neutral
Sector: Consumer Staples 120
The Coca-Cola Company (NYSE:KO) is the world’s biggest carbonated beverage company. The firm dominates its industry through a robust logistics network that allows it to ship products to nearly any country on the planet. While The Coca-Cola Company (NYSE:KO) enjoys a global brand name that ensures loyalty, its logistics network and volumes are key to ensuring high revenues that drive margins. This is particularly true as the beverage industry is quite margin-light. Like Colgate, this means that The Coca-Cola Company (NYSE:KO) is always on the lookout for opportunities to increase its presence in emerging markets such as Latin America. Other avenues for growth include new product brands that target health-conscious users and leverage The Coca-Cola Company’s (NYSE:KO) ability to beat smaller firms through its manufacturing and cost advantages.
During its Q3 2024 earnings call, The Coca-Cola Company’s (NYSE:KO) management commented on the agriculture market which is another key aspect of its hypothesis:
“We’re encouraged by our underlying performance and believe we’re well positioned to deliver on our long-term growth opportunity. We expect pricing from intense inflationary markets to moderate in 2025 and recycling the impact of currency devaluations from these markets in 2024. With respect to our commodity environment, we expect prices on industrial materials to remain relatively stable, while agricultural commodities will continue to face volatility and higher prices. We will continue to invest behind our brands as we have been doing, while at the same time we will leverage a range of productivity levers to drive efficiency and effectiveness across our P&L. We expect elevated net interest expense resulting from the deposit made related to the ongoing IRS tax dispute and upcoming fairlife contingent consideration payment.”
27. AECOM (NYSE:ACM)
Number of Hedge Fund Investors In Q2 2024: 32
UBS’ Sector Rating: Neutral
Sector: Industrial
AECOM (NYSE:ACM) is one of the biggest engineering and consulting services companies in the world. Since it’s a contractor, AECOM’s (NYSE:ACM) hypothesis is heavily dependent on two key factors. The first is the state of the construction industry and the second is the contract mix for its revenue. On the former front, the sluggish nature of the global construction industry has led to weak share price performance as AECOM’s (NYSE:ACM) shares are up 17.24% year to date. However, US construction activity has picked up following the Fed’s interest rate cut in September, and further easing can lead to tailwinds. On the latter front, AECOM’s (NYSE:ACM) revenue is divided across fixed price, full price, and reimbursement contracts. Reimbursement and full-price contracts account for 77% of AECOM’s (NYSE:ACM) revenue as of nine months ending in June 2024. Any shift towards fixed-price contracts is harmful while full-price contracts carry the best outcome for the firm. Additionally, AECOM (NYSE:ACM) can also benefit from the billions of dollars in infrastructure spending unlocked by the Biden Administration’s infrastructure and semiconductor bills.
AECOM (NYSE:ACM) is also focused on integrating digital technologies across its operations. Here’s what management shared during the Q3 2024 earnings call:
“For instance, the adoption of digital tools is growing across the company. As we detailed during our December Investor Day, we aim for 5% to 15% of our work hours to be delivered through scripts and code that we create by leveraging our extensive digital libraries. This will increase the capacity and extend our capabilities of our teams. We’re also transforming how we work through AI by integrating AI into specific areas of our business, such as our bid and proposal process.
Although it is early to fully measure the potential benefits of these technologies, the signals are quite positive. Overall, these investments are designed to strengthen our company and help us exceed our 17% long-term margin target.”
26. The Boeing Company (NYSE:BA)
Number of Hedge Fund Investors In Q2 2024: 42
UBS’ Sector Rating: Neutral
Sector: Industrial
The Boeing Company (NYSE:BA) is an embattled defense and civilian aerospace company. 2024 has been one of the worst on record for the firm as it struggles with production problems with its bread-and-butter airplane manufacturing business and faces off protesting employees. As a result, it’s unsurprising that The Boeing Company’s (NYSE:BA) shares are down 38.7% year to date. October has been an eventful month for the firm. Not only has the FAA announced that it will open a new oversight review into its safety practices, but The Boeing Company’s (NYSE:BA) CFO has also warned that the firm will continue to bleed cash throughout 2024 and 2025. Naturally, this isn’t good news for investors as it restricts the firm’s ability to pay dividends and invest in growth. The Boeing Company (NYSE:BA) is also reportedly considering selling its businesses to raise cash for the turnaround. One such sale of a defense equipment maker has occurred, and a WSJ report suggests that the space division might be next. Cash is crucial for the firm if it’s to avoid a rating downgrade, and plans shared with investors envision as much as $24.3 billion raised through a stock offering.
During the Q3 2024 earnings call, The Boeing Company’s (NYSE:BA) management shared insights into the firm’s affairs:
“We have employees who are thirsty to get back to the iconic company they know, setting the standard for the products that we deliver. So my mission here is pretty straightforward, turn this big ship in the right direction and restore Boeing to the leadership position that we all know and want. Now to do this is going to require changes in four particular areas. And let me introduce them, and I’ll come back and discuss each one. First, we need a fundamental culture change in the company; second, we must stabilize the business; third, we need to improve our execution discipline on new platform commitments across the company; and fourth, while doing the first three, we must build a new future for Boeing.”
25. Norfolk Southern Corporation (NYSE:NSC)
Number of Hedge Fund Investors In Q2 2024: 50
UBS’ Sector Rating: Neutral
Sector: Industrial
Norfolk Southern Corporation (NYSE:NSC) is one of the biggest railroad transportation companies in North America. It primarily serves the needs of the American markets and ships a variety of dry and wet goods. Norfolk Southern Corporation’s (NYSE:NSC) rail network covers 22 states and the firm’s reliance on the industrial industry also means that it is exposed to economic health. Consequently, as industrial activity has been muted in the US due to high rates and inflation, Norfolk Southern Corporation’s (NYSE:NSC) shares are up by a modest 7.25% year to date. However, the pent-up momentum in the stock is also evident by the fact that its shares jumped by a sharp 11% in July. The jump followed Norfolk Southern Corporation’s (NYSE:NSC) $3.04 billion revenue met analyst estimates and EPS of $3.06 beat estimates. Investors were pleased that the firm had managed to mitigate the effects of a devastating train crash in East Palestine, Ohio last year.
Aristotle Investment Partners mentioned Norfolk Southern Corporation (NYSE:NSC) in its Q2 2024 investor letter. Here is what the fund said:
“Norfolk Southern detracted from performance in the second quarter. The company reported a worse-than-expected earnings result for its first quarter in late April. In the second quarter, the company has been reporting weaker-than-expected railcar volumes on its network. This weaker volume has resulted in some sell-side analysts reducing their estimates for the second quarter of 2024. In addition, sentiment is weak because an activist shareholder was not successful in replacing the CEO of Norfolk Southern during a proxy battle in May; however, the activist did succeed in replacing some board members.”
24. Suncor Energy (NYSE:SU)
Number of Hedge Fund Investors In Q2 2024: 44
UBS’ Sector Rating: Neutral
Sector: Energy 208
Suncor Energy (NYSE:SU) is a sizeable Canada-based energy company with close to 15,000 employees. This makes it one of the biggest energy companies in North America. It is a diversified oil company with operations across the oil supply chain from production to refining and marketing. Its exposure to the oil and energy industry means that Suncor Energy’s (NYSE:SU) stock is at the mercy of economic activity and oil prices. Additionally, the firm also has to ensure oil product costs are kept under control and ensure it does not rely on excessive leverage to fund operations. Specifically for Suncor Energy (NYSE:SU), the firm is currently at the peak of a multi-year turnaround effort led by activist investor Elliot Management. It holds a $3 billion stake in the firm and has led to unique strategies at the firm such as autonomous large hauler trucks that reduce costs and improve safety.
Suncor Energy’s (NYSE:SU) management shared details about these trucks during the Q2 2024 earnings call. Here is what they said:
“I’ll move to a second area of targeted improvement, mining. Peter said it much more eloquently than I did on May 21 or than I will. But our mining strategy in a nutshell is fewer trucks, bigger trucks, autonomous trucks, operated better, maintained cheaper.
We’ve said before we have 55 new 400-ton trucks on order arriving and they will replace twice as many smaller, less efficient third-party trucks. The first 22 are in operation. That’s 6 more than our last call, 15 more will arrive at Fort Hills through November and the final 18 will be at base plant in the fourth quarter of this year and the first quarter of next year. Last week, I sat behind the wheel of one of these bad boys at Fort Hills and I got to tell you, I was ready to drive it into the mine, but sadly Peter concluded I wasn’t qualified. Recall in total, these 55 new trucks will lower our overall corporate break-even by saving more than $300 million a year in operating costs. We talked about autonomous previously. Our fleet conversion continues at base plant.”
23. ConocoPhillips (NYSE:COP)
Number of Hedge Fund Investors In Q2 2024: 72
UBS’ Sector Rating: Neutral
Sector: Energy
ConocoPhillips (NYSE:COP) is a sizable American oil and gas company with a solid presence in the shale oil industry. As a result, while Suncor’s stock has rallied this year due to tailwinds from its turnaround successes, ConocoPhillips’ (NYSE:COP) stock has suffered. Oil prices have fluctuated throughout 2024 on the back of a weakening Chinese economy and conflict in the Middle East. For instance, ConocoPhillips’ (NYSE:COP) stock dropped by 3.7% at the start of September after OPEC production grew and Chinese demand slowed. This pushed crude oil prices below $75 and WTI below $71. However, ConocoPhillips’ (NYSE:COP) scale, as evidenced by cash and equivalents of $6 billion has allowed it to keep up with the wave of acquisitions that took the US oil industry by storm last year. The firm aims to acquire Marathon Petroleum for a whopping $22.5 billion price tag, and it is anticipated that the deal will bump ConocoPhillips’ (NYSE:COP) free cash flow per share by 11%. Consequently, any miss related to the deal’s outcome could create headwinds for the stock.
ConocoPhillips’ (NYSE:COP) management commented on the deal during the Q2 2024 earnings call:
“Now regarding our planned acquisition of Marathon Oil, we remain very excited about this transaction and integration planning activities are underway to ensure a seamless transition upon close.
The Marathon Oil shareholder vote has been set for August 29, and we are working through the FTC’s second request that we received in mid-July. We still expect to close the transaction late in the fourth quarter. On return of capital, we remain committed to distributing at least $9 billion to shareholders this year on a stand-alone basis. As we said back in May, we will be incorporating our VROC into our base dividend starting in the fourth quarter, representing a 34% increase in the ordinary dividend. And consistent with our long-term track record, we are confident that we can grow this dividend at a top quartile rate relative to the S&P 500. Finally, as we previously announced with the Marathon acquisition, we will be increasing our annualized buyback run rate by $2 billion upon closing with a plan to retire the equivalent amount of newly issued equity in 2 to 3 years.”
22. Exxon Mobil Corporation (NYSE:XOM)
Number of Hedge Fund Investors In Q2 2024: 92
UBS’ Sector Rating: Neutral
Sector: Energy
Exxon Mobil Corporation (NYSE:XOM) is one of the biggest oil and gas companies in the world. A production base and operations spread worldwide have enabled the firm to amass significant resources as evidenced by its $31.5 billion in cash and equivalents and trailing twelve-month revenue of $341 billion. Yet, on the flip side, the sizeable global operations base requires Exxon Mobil Corporation (NYSE:XOM) to ship large volumes. Otherwise, the firm risks losing economies of scale and suffering from higher costs. Consequently, its volumes depend on the ability to increase its production base. Exxon Mobil Corporation (NYSE:XOM) can achieve this either through getting permits for new sites or through acquisitions. On this front, the firm is targeting expanding its presence in the US oil production hub, the Permian Basin by acquiring Pioneer Energy for an unbelievable $60 billion price tag. Exxon Mobil Corporation (NYSE:XOM) is also expanding its production in Singapore, Guyana, and the US. Any cost inefficiencies or production benefits from these efforts can create headwinds or tailwinds for the shares.
Madison Funds mentioned Exxon Mobil Corporation (NYSE:XOM) in its Q1 2024 investor letter. Here is what the fund said:
“This quarter we are highlighting Exxon Mobile (XOM) as a relative yield example in the Energy sector. XOM is a leading integrated oil and natural gas company. It has upstream assets that develop and produce oil and natural gas, along with downstream refining and chemical manufacturing assets. We believe it has attractive low-cost acreage in the Permian basin and has a sizeable growth opportunity in Guyana. Further, we think XOM has a sustainable competitive advantage due to size and scale, and its ability to integrate refining and chemical assets provides a low-cost advantage versus competitors.
Our thesis on XOM is that it will grow production volumes of oil and gas moderately over the next few years, while limiting excessive capital investment that plagued the industry from 2014-2020. Production growth will come from its 2023 acquisition of Pioneer Natural Resources, which is the largest producer in the Permian basin. XOM plans to double its Permian output by 2027, to 2 million barrels per day. Capital spending will be limited to $20-25 billion per year through 2027, which should allow for significant amounts of cash to be returned to shareholders including a $35 billion share repurchase program and continued dividend increases. Higher oil prices would provide a tailwind to our thesis but are not necessary. We think XOM can grow earnings and cash flow if oil prices remain above $60 per barrel.
The fund purchased XOM in March 2024 at $111. At the time of purchase, XOM had a dividend yield of 3.3% and a relative dividend yield of 2.4x the S&P 500, which was above its 20-year average of 1.75x. The company has an AA-rated balance sheet by Standard & Poor’s and is a Dividend Aristocrat that has raised its annual dividend 41 years in a row. XOM is one of only two Energy companies on the Dividend Aristocrat list, which requires dividend increases for 25 consecutive years.”
21. Abbott Laboratories (NYSE:ABT)
Number of Hedge Fund Investors In Q2 2024: 69
UBS’ Sector Rating: Neutral
Sector: Healthcare 273
Abbott Laboratories (NYSE:ABT) is a diversified healthcare company that sells medicines, medical devices, diagnostic products, and others. Established in 1888, it is one of the largest firms of its kind as evidenced by total assets of $73 billion and cash and equivalents of $7.2 billion. While its diversified product portfolio enables Abbott Laboratories (NYSE:ABT) to fire on multiple fronts, it also means that turmoil in one or multiple markets also creates headwinds. For instance, the firm’s third-quarter results saw its nutritional products business lose market share internationally while a tight spending environment led to slower diagnostic equipment sales. Consequently, Abbott Laboratories’ (NYSE:ABT) Q2 results saw a modest 4% revenue growth to $10.4 billion. Q3 revenue was $10.3 billion. Its devices business is more important to the firm than other segments as it accounted for 44.8% of Abbott Laboratories’ (NYSE:ABT) revenue during H1 2024. On this front, its Structural Heart and Electrophysiology products have been growing in double-digit percentages.
Abbott Laboratories’ (NYSE:ABT) management shared details about these segments during its Q3 2024 earnings call:
“In Electrophysiology, growth of 14% was driven by double-digit growth in both the U.S. and international markets and similar to previous quarters, the growth was broad-based across the portfolio, including double-digit growth in catheters and cardiac mapping related products. We also achieved several important milestones as it relates to our electrophysiology new product pipeline, and this includes completing enrollment ahead of schedule in our VOLT-AF U.S. IDE trial and after we complete the required patient follow-up phase, we expect to file for FDA approval next year. Earlier this month, we announced that we began enrolling patients in our focal FLEX clinical trial designed to assess our new TactiFlex DUO catheter, which offers physicians the option of using PFA and radio frequency energy to treat atrial fibrillation.”
20. Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Investors In Q2 2024: 96
UBS’ Sector Rating: Neutral
Sector: Healthcare
Merck & Co., Inc. (NYSE:MRK) is one of the largest pharmaceutical companies in the world. The firm enjoys considerable resources which have enabled it to establish a foothold in the high-end cancer drug market. Merck & Co., Inc.’s (NYSE:MRK) resources of $7 billion in cash and $10 billion in receivables which are a part of its $96 billion in total assets allow it to make and sell drugs such as KEYTRUDA. KEYTRUDA is Merck & Co., Inc.’s (NYSE:MRK) blockbuster cancer drug and it brought in a whopping $7.3 billion in sales in Q2. Over its lifetime, it is expected to be the most valuable drug in the world and generate $33 billion in sales in 2027 according to FactSet. However, Merck & Co., Inc.’s (NYSE:MRK) patent is set to expire in 2028, which could create headwinds. Consequently, along with KEYTRUDA, the firm’s other drugs, and its research portfolio play a key role in its hypothesis. On these fronts, Merck & Co., Inc. (NYSE:MRK) has acquired a cancer antibody for $750 million and it also focusing on its HPV vaccine GARDASIL.
Baron Funds mentioned Merck & Co., Inc. (NYSE:MRK) in its Q1 2024 investor letter. Here is what the fund said:
“Global pharmaceutical company Merck & Co., Inc. contributed on the continued growth of Keytruda, the company’s key asset and the leading immuno-oncology agent used to treat a variety of cancers. The FDA’s late March approval of pulmonary arterial hypertension drug sotatercept, also drove share gains. We retain conviction as Merck has started to transition from prioritizing its Keytruda franchise to building a more diversified business, with a focus on the Gardasil vaccine, pneumococcal vaccine development, and cardiovascular drug development, well in advance of the scheduled expiration of patent protection/exclusivity rights.”
19. Thermo Fisher Scientific Inc. (NYSE:TMO)
Number of Hedge Fund Investors In Q2 2024: 108
UBS’ Sector Rating: Neutral
Sector: Healthcare
Thermo Fisher Scientific Inc. (NYSE:TMO) is a pharmaceutical raw materials and lab equipment company. It is one of the largest firms of its kind, which is key for the industry that it operates in. This is because its market presence enables Thermo Fisher Scientific Inc. (NYSE:TMO) to develop deep industry partnerships for crucial materials that are used to make medicine. Yet, its reliance on the pharmaceutical industry, an already notoriously cyclical sector, coupled with the fact that 55% of Thermo Fisher Scientific Inc.’s (NYSE:TMO) revenue is from pharma hardware means that the firm depends to a large extent on robust economic performance. Consequently, it’s unsurprising that the shares are up by just 1.19% year to date. Thermo Fisher Scientific Inc.’s (NYSE:TMO) shares fell by 8% in October driven by several factors such as a weak third-quarter earnings report which saw its $10.6 billion revenue miss analyst estimates of $10.64 billion to stoke worries of a slower recovery in the pharma industry. However, Thermo Fisher Scientific Inc.’s (NYSE:TMO) $5.28 EPS beat analyst EPS of $5.25. The firm also raised the low guidance of its annual profit per share to $21.29 and its bread and butter lab products business revenue of $5.74 billion beat analyst estimates of $5.45.
Despite a slow pharmaceutical environment, Thermo Fisher Scientific Inc. (NYSE:TMO) is busy launching new products to capture growth when it picks up. Here’s what management shared during the Q3 2024 earnings call:
“To enable the development of advanced materials, we launched the Thermo Scientific Iliad scanning transmission electron microscope, which integrates a number of our advanced analytical technologies into a seamless and user-friendly workflow. This offers researchers deeper insights into the chemical nature of the most sophisticated advanced materials down to the atomic level.
The Iliad incorporates our most innovative high-resolution spectrometer to accurately determine the composition of materials, as well as our proprietary energy filter for detailed imaging and chemical analysis of samples. We recently unveiled Iliad at the European Microscopy Conference in Copenhagen, Denmark, and the feedback has been incredibly positive. Turning to innovations in life sciences within our biosciences business, we launched the Applied Biosystems MagMAX Sequential DNA/RNA kit, which maximizes the isolation of DNA and RNA from blood cancer samples, helping researchers identify unique insights of cancer-causing genetic alterations. And we also launched the Invitrogen Vivofectamine Delivery Solutions, a novel method for delivering nucleic acids into multiple targets with therapeutic effect, paving the way for groundbreaking new medicines.”
18. Equity Residential (NYSE:EQR)
Number of Hedge Fund Investors In Q2 2024: 30
UBS’ Sector Rating: Neutral
Sector: Real Estate
Equity Residential (NYSE:EQR) is a real estate company that focuses on the residential sector. Consequently, its shares have performed tepidly year to date, as the stock is up 19% year to date. Higher interest rates mean that developers find it hard to raise capital to build projects, which isn’t great for the real estate sector. However, Equity Residential (NYSE:EQR) benefits from its resources as they allow the firm to weather the storm and position itself for growth once the economic clouds have dissipated. The firm has total assets of $20.9 billion out of which investment properties account for $18.9 billion. Equity Residential (NYSE:EQR) has also been priming itself for the low-rate future that could see rentals rise as job growth leads to more working people in cities such as Seattle. One such move came in August when the firm bought a $1 billion portfolio of residential properties from Blackstone.
Baron Funds mentioned Equity Residential (NYSE:EQR) in its Q2 2024 investor letter. Here is what the fund said:
“In the second quarter, the shares of Equity Residential (NYSE:EQR), the largest U.S. multi-family REIT, appreciated due to continued strong operating updates, an improved full-year growth outlook, and faster-than-expected improvement in the company’s West Coast markets. Management has assembled an excellent portfolio of Class A apartment buildings located in high barrier-to-entry coastal markets with favorable long-term demographic trends and muted overall supply growth. Please see the “Top net purchases” for further thoughts on the company.
In the second quarter, we increased the Fund’s REIT exposure to best-in-class multi-family owners/operators Equity Residential and AvalonBay Communities, Inc. Our meetings with each management team supported our view that both companies are led by astute executives that are highly focused on driving value creation for shareholders…” (Click here to read the full text)
17. Prologis, Inc. (NYSE:PLD)
Number of Hedge Fund Investors In Q2 2024: 56
UBS’ Sector Rating: Neutral
Sector: Real Estate
Prologis, Inc. (NYSE:PLD) is an industrial real estate company that owns and operates logistics properties. These include airport logistics centers, fulfillment centers, and warehouses. Consequently, the firm is at the mercy of both the global economy and interest rates. Warehouse and other facilities are in higher demand and occupancy – to drive up rent rates – when economic growth is high and shipments are booming. Consequently, the fact that Prologis, Inc.’s (NYSE:PLD) shares are down 13.9% year to date is unsurprising. This has been driven in part by a massive 18% drop in April which was fueled to a large extent by the firm reducing its fiscal 2024 EPS to $3.25 from an earlier $3.325. As part of its third-quarter earnings, Prologis, Inc. (NYSE:PLD) reported an occupancy rate of 96% which was lower than the previous quarter’s 96.5%, and indicated that perhaps the market for its properties is yet to fully bottom out.
Baron Funds mentioned Prologis, Inc. (NYSE:PLD) in its Q2 2024 investor letter. Here is what the fund said:
“The shares of Prologis, Inc. (NYSE:PLD) underperformed during the second quarter. Prologis is a REIT that is the global leader in logistics real estate with a focus on high-barrier, high-growth markets. The share price began to correct in April when the company reported strong first quarter financial results but slightly lowered its full-year outlook. Rent growth has been moderating in the industrial logistics real estate sector as tenants slow their decision- making amidst an environment of heightened macroeconomic uncertainty, while a wave of recently delivered new development projects provide tenants with more real estate options. We view these headwinds as transitory and remain quite optimistic about Prologis’s multi-year growth prospects.
We expect industry fundamentals will firm up in the coming quarters in light of still healthy levels of demand combined with a dearth of expected new development deliveries. Long-term demand is poised to benefit from several ongoing secular tailwinds, including the growth of e-commerce, the build out of “last mile” supply chains, and the desire for more “just-in-case” inventory of goods. Management, who we think is top notch, expects to grow cash flow at close to 10% per year over the next several years as the company resets the portfolio’s low in-place rents up to market levels and investments in development, data centers and energy begin to bear fruit.”
16. American Tower Corporation (NYSE:AMT)
Number of Hedge Fund Investors In Q2 2024: 63
UBS’ Sector Rating: Neutral
Sector: Real Estate
American Tower Corporation (NYSE:AMT) is a specialty real estate investment trust that caters to the needs of the technology and communications industries. This has proven crucial for its hypothesis in a high-rate environment that has generally spelled trouble for the real estate industry as the stock is up 23.7% over the past twelve months. However, while it has exposure to data centers, American Tower Corporation’s (NYSE:AMT) global position has also proven to be somewhat of a headache as the firm has failed to ensure robust performance worldwide. This also led it to divest its Indian operations earlier this year. American Tower Corporation (NYSE:AMT) benefits from the fact that it signs contracts that range between five to ten years, which enable it to lock in customers during volatile periods and also provide investors insight into future cash flows. Additionally, along with data centers, a key source of revenue for the firm is its leases with telecommunications firms. This was evident following American Tower Corporation’s (NYSE:AMT) third-quarter earnings which saw the stock tank by 4% as the firm’s $2.52 billion revenue missed analyst revenue estimates of $2.76 billion. The firm’s funds from operations (FFO) of $2.52 per share also missed estimates of $2.58 with the high-end full-year FFO guidance of $10.03 also missing estimates of $10.59.
ClearBridge Investments mentioned American Tower Corporation (NYSE:AMT) in its Q2 2024 investor letter. Here is what the fund said:
“American Tower, which we also added this quarter, is a great example of a new position that has a less expansive upside, but immensely compliments our overall portfolio positioning and utility. The company, which boasts incredible fundamental stability and built-in growth and inflation protection via its customer contracts, currently trades near decade lows across a variety of valuation measures.”
15. Air Products and Chemicals, Inc. (NYSE:APD)
Number of Hedge Fund Investors In Q2 2024: 47
UBS’ Sector Rating: Neutral
Sector: Materials 169
Air Products and Chemicals, Inc. (NYSE:APD) is an industrial raw materials firm that sells gasses. It is a diversified firm with a presence in Asia, North America, Europe, and other regions. As the global economy continues to reel from the impact of high interest rates and inflation, the firm’s diversified global base has worked against it. For the nine months ending in June 2024, Air Products and Chemicals, Inc.’s (NYSE:APD) sales in Asia, Europe, the Middle East, and the Americas have fallen annually. Consequently, the shares have gained 14.4% year to date and would have gained just 4% had it not been for a catalyst in October. This saw the stock rise 9.52% after activist investor Mantle Ridge acquired a $1 billion stake in the company. This means that in the future, Air Products and Chemicals, Inc.’s (NYSE:APD) stock will also depend on the turnaround efforts at the company and whether they unlock value for shareholders.
ClearBridge Investment mentioned Air Products and Chemicals, Inc. (NYSE:APD) in its Q3 2024 investor letter. Here is what the fund said:
“Air Products and Chemicals, Inc. (NYSE:APD) has also made strong contributions recently, delivering operationally and announcing a major offtake agreement for its NEOM green hydrogen project in June. Strong fundamentals for APD are shining through a soft Chinese industrial economy, and it continues to shore up the strength of its core industrial gases franchise, committing to not invest additional capital on big projects until they soak up existing capacity, putting a management structure in place to allow for more accountability and announcing board-initiated succession planning that will help built investor confidence for the future. The company is also tightening up its operational focus by divesting non-core assets and streamlining operations.”
14. Corteva Inc. (NYSE:CTVA)
Number of Hedge Fund Investors In Q2 2024: 43
UBS’ Sector Rating: Neutral
Sector: Materials
Corteva Inc. (NYSE:CTVA) is a sizable agricultural supplies giant. The firm primarily sells seeds and pesticides. Even though the agriculture market has been slow this year, Corteva Inc.’s (NYSE:CTVA) stock has performed somewhat well as the shares are up 26.8% year to date. As of H1 2024, 70% of the firm’s revenue comes from its Seeds business, meaning that global food trends as well as other factors such as grain prices and food stocks play a key role in the hypothesis. Within Seeds, 69% of Corteva Inc.’s (NYSE:CTVA) revenue comes from Corn. As a result, the trends in the corn market are indispensable when trying to gauge the determinants of its share price. On this front, recent trends in the US have indicated that corn supplies in the US are at multi-year high levels. As a result, Corteva Inc. (NYSE:CTVA) might struggle in the short term as inventory stabilizes. However, the firm enjoys key advantages particularly when it comes to gene editing and seeds. Recently, it announced a fungal-resistant corn disease and similar developments could lead to tailwinds.
Corteva Inc.’s (NYSE:CTVA) management shared details about its technology strengths during the Q2 2024 earnings call:
“Earlier this year, we announced the commercial availability of Pioneer brand Z-series soybeans in the U.S. and Canada, which is the next generation of industry-leading genetics with the Enlist traits.
This new class of soybeans offers farmers a strong defensive package, with a generational leap in yield potential and agronomic performance over any soybean lineup Pioneer has ever introduced. In extensive 2023 IMPACT trials, Z-series soybeans showed an average yield advantage of 2.7 bushels per acre over our own A-series soybeans, which delivers substantial economic benefit to growers. And I know most of you are well aware of how the Enlist transition has supported our aim of becoming royalty neutral by the end of the decade, but it’s worth noting that our royalty income stream is also accelerating quickly in corn. In the first half of this year, we grew our royalty income by an impressive 40% when compared to the same period last year, led by the strength of new corn trait technologies like PowerCore Enlist.”
13. Freeport-McMoRan Inc. (NYSE:FCX)
Number of Hedge Fund Investors In Q2 2024: 79
UBS’ Sector Rating: Neutral
Sector: Materials
Freeport-McMoRan Inc. (NYSE:FCX) is a mining company that sits right at the heart of the global copper supply chain. The firm sold a whopping 1.1 billion pounds of copper in Q1, which indicates the vast economies of scale that it enjoys in an industry that is typically quite capitally intensive. However, the reliance on copper also means that Freeport-McMoRan Inc. (NYSE:FCX) is left at the mercy of global industrial and electrification trends – particularly the slowdown in China. These have led to muted share price performance in 2024, as the shares are up by a modest 9.2% year to date. On the flip side, a pickup in Chinese economic activity and further government stimulus could translate into tailwinds. Another potential catalyst could be significant cost improvements through new technology. Through this Freeport-McMoRan Inc. (NYSE:FCX) is aiming to extract copper by leaching it from waste rocks through a process that could cut production costs by half.
Freeport-McMoRan Inc.’s (NYSE:FCX) management shared key details about the leaching initiative during the Q3 2024 earnings call:
“On Slide 7, you can see that early results continue to indicate significant value potential. Just a reminder, we achieved our initial targeted run rate of 200 million pounds per annum of copper per annum at the end of last year and are now driving initiatives to scale this initiative to 300 million to 400 million pounds per annum in the next couple of years. Ultimately, our goal was to achieve 800 million pounds per annum from this value enhancing growth initiative. This is the size of a major new mine with low capital investment required, low incremental operating costs and that will significantly enhance the value and competitive position of our Americas production.
You can see on the slide, the significant growth in incremental volumes from these initiatives over the last several quarters, our results have been achieved by enhancing heat retention in the leach stockpiles using data from sensors and analytics to identify targets and through deploying new operational tactics to direct solution injection to areas that were previously inaccessible. We continue to build confidence in boosting the run rate to 300 million to 400 million pounds per year during 2026. Some of the examples of the initiatives that are now underway that will add volumes in the future include expanding our surface area under leach by using helicopters to install irrigation in areas previously inaccessible under conventional techniques and by scaling our targeted solution injection wells.”
12. Truist Financial Corporation (NYSE:TFC)
Number of Hedge Fund Investors In Q2 2024: 42
UBS’ Sector Rating: Attractive
Sector: Financials
Truist Financial Corporation (NYSE:TFC) is an American regional bank headquartered in Charlotte, North Carolina. It caters to the needs of commercial and retail customers. The bank also has wealth management and insurance holding divisions. The diversified service lineup allows Truist Financial Corporation (NYSE:TFC) to hedge its income statement against varying economic conditions. Of particular note is the balance between wealth management and consumer banking. While the latter typically struggles in a high inflation and interest rate environment, the former is not affected as hard. The diversification was pushed to the forefront in Truist Financial Corporation’s (NYSE:TFC) financials for H1 2024. They saw the bank’s noninterest income take a $6.7 billion hit due to securities losses. However, this was balanced out by investment banking, wealth management, and other businesses as they stemmed the bleeding to a still remarkable $3.7 billion. Noninterest income will continue to play a key role in Truist Financial Corporation’s (NYSE:TFC) hypothesis as lower rates gradually reduce the banking sector’s interest income.
Truist Financial Corporation’s (NYSE:TFC) management shared its expectations for Q4 during the Q3 2024 investor call:
“Looking into the fourth quarter of 2024, we expect revenue to decrease 1.5% from the third quarter of 2024 adjusted revenue of $5.1 billion. We expect net interest income to decrease 1.5% in the fourth quarter, primarily driven by lower commercial loan balances and some pressure to our net interest margin due to the temporary lag in our deposit beta. Our net interest income outlook assumes two 25 basis point reductions in the federal funds rate over the remainder of 2024, one cut in November and another cut in December. We expect non-interest income to decline by 2%, driven primarily by lower investment banking and trading revenue as the third quarter performance was helped by some pull-forward of capital markets activity from the fourth into the third quarter.”
11. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Investors In Q2 2024: 92
UBS’ Sector Rating: Attractive
Sector: Financials
Bank of America Corporation (NYSE:BAC) is a diversified bank that is also one of the biggest consumer banks in America. It serves the needs of 66 million customers to provide a wide competitive moat in the industry. At the same time, this mega customer base also means that Bank of America Corporation (NYSE:BAC) has to keep its interest costs in check, particularly during times of high rates. This fact was as clear as daylight in H1 2023 when the bank’s interest expense jumped to $32.4 billion or by a whopping 754%. The trends persisted in H1 2024 when Bank of America Corporation’s (NYSE:BAC) interest expense grew by 40% while interest income dropped by $900 million. The trend of lower net interest income also persisted during the third quarter. This was because, in the nine months ending in September 2024, Bank of America Corporation’s (NYSE:BAC) net interest income fell by 2.9%. However, diversification, aided in particular by investment banking proved to be a boon. The bank’s investment banking fees jumped by 18% to $1.4. billion in Q3 due to higher market activities, and overall, allowed it to ensure that revenue remained flat annually on a nine-month basis.
Bank of America Corporation’s (NYSE:BAC) management commented on its investment banking division during the Q3 2024 earnings call. Here is what they said:
“On Slide 15, you see Global Banking results. This business produced earnings of $1.9 billion down 26% year-over-year as improved investment banking fees and treasury services revenue were overcome by lower net interest income and higher provision expense. Revenue declined 6%, driven by the impact of interest rates and deposit rotation.
In our global treasury services business, fees for managing the cash of clients continue to offset some of the NII pressure from higher rates. Investment banking had a strong quarter, growing fees 18% year-over-year to $1.4 billion, led by debt capital markets fees, mostly in leveraged finance and investment grade. We finished the quarter strong, maintaining our number three investment banking fee position. What began as a slow quarter this summer gained some momentum through September and the pipeline looking forward looks solid.”
10. Sempra (NYSE:SRE)
Number of Hedge Fund Investors In Q2 2024: 29
UBS’ Sector Rating: Attractive
Sector: Utilities
Sempra (NYSE:SRE) is one of the largest electricity and gas utilities in Texas and California. The firm serves the needs of more than 40 million customers across California and Texas. This provides it exposure to two of the richest states in America, and Sempra (NYSE:SRE) also benefits from the fact that it has a presence in the rapidly growing liquefied natural gas (LNG) industry. As of now, the firm is engaged in crucial regulatory negotiations in California through which it aims to set new rates and bring return on equity at par with market conditions. A preliminary decision earlier this year announced $1.6 billion in rate relief. Sempra (NYSE:SRE) is also developing hydrogen and clean energy facilities in California, which could unlock catalysts for the firm, particularly from AI data centers.
Sempra’s (NYSE:SRE) management also shared details about its LNG plans during the Q2 2024 earnings call. Here is what they said:
“At ECA LNG Phase 1, we are roughly 85% complete. However, our contractor has experienced labor retention and productivity issues in recent months. As a result, our commercial operations date will be delayed until the spring of 2026. We are actively engaged with our contractor to advance the project, and we’ll see increased capital expenditures for the project in the form of additional carrying costs and lower estimated commissioning revenues, which are based on forward price curves. Despite the delay of potential changes in capital, we still expect to maintain strong integrated financial returns, consistent with our original forecast at the time that we took FID in 2020. This is the result of a combination of factors, including optimization opportunities, stronger LNG demand over the long-term and inflation protection within the SPAs. Moving to Port Arthur LNG, we’re making steady progress on Phase I.”
9. Entergy (NYSE:ETR)
Number of Hedge Fund Investors In Q2 2024: 63
UBS’ Sector Rating: Attractive
Sector: Utilities
Entergy (NYSE:ETR) is a Louisiana-based utility company. It has more than 24 GW of power generation capacity in its portfolio and relies on clean and traditional sources to generate power. Since Entergy (NYSE:ETR) is a regulated utility, the firm has the advantage of locked-in rates that prevent it from lowering rates during periods of demand. Yet, on the flip side, this also leaves the firm at the mercy of regulators whose approved rates might make it difficult to maintain margins. On this front, Entergy (NYSE:ETR) scored a win in 2024 when it secured an extension from the Louisiana Public Service Commission (LPSC) for its fixed-rate plan extension. This should improve the firm’s operating outlook in the state by allowing it to invest in the grid. Additionally, Entergy (NYSE:ETR) has made inroads into the data center industry by signing a deal with Amazon to provide data center power in Mississippi. The clearer regulatory outlook and data center inroads have helped the shares which are up 30.9% year to date.
Entergy (NYSE:ETR) has been busy setting rates and working with regulators in other states as well. Here’s what management shared during the Q2 2024 earnings call:
“We continue to work well with the Mississippi Commission to achieve good outcomes that support our customers and the operating company’s credit, which puts Entergy Mississippi in a strong position to bring additional growth to the state which benefits all stakeholders. In addition, Entergy New Orleans and Entergy Arkansas filed their annual FRP.
We expect new rates to be in effect in September for New Orleans and January for Arkansas. And finally, our gas LDC sale continues to move along. For Entergy Louisiana, the staff report and recommendation was filed on Tuesday of this week, stating that staff believe the transaction is in the public interest subject to customary conditions. We believe the matter will be taken up by the LPSC on August 14 at its business and executive meeting. For Entergy New Orleans, the hearing is scheduled to begin on September 9, and we expect a decision from the City Council in early 2025. We remain on track to close the transaction by the third quarter of 2025.”
8. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Investors In Q2 2024: 73
UBS’ Sector Rating: Attractive
Sector: Utilities
NextEra Energy, Inc. (NYSE:NEE) is a stock that is an unsurprising addition to UBS’ list of the top US stocks to buy. This is because the firm is one of the biggest clean energy utilities in America courtesy of its 33GW of power generation capacity. The firm further benefits from the fact that its power generation portfolio is diverse and factors in several clean sources such as wind, nuclear, and solar. This is key for firms like NextEra Energy, Inc. (NYSE:NEE) due to the unique nature of renewable energy generation which often means that sources like solar are unable to provide power during dark hours. Despite the fact that clean energy stocks tend to struggle when rates are high, NextEra Energy, Inc.’s (NYSE:NEE) shares have gained 28.5% year to date. The optimism is driven in part by Wall Street and Silicon Valley’s renewed interest in nuclear power to meet COP28 goals and power up massive AI data centers. However, NextEra Energy, Inc.’s (NYSE:NEE) massive backlog of 24GW of renewable power generation capacity is also proving to be costly. The firm aims to raise equity to fund expansion, and the shares dropped by 4% in October after it announced a $1.5 billion raise.
NextEra Energy, Inc.’s (NYSE:NEE) management commented on its nuclear capacity expansion plans during the Q3 2024 earnings call. Here is what they said:
“We’ve added another approximately 3 gigawatts of renewables and storage this quarter, our second quarter in a row. As a top operator of all forms of power generation, we often get asked about nuclear and gas. Let me start with nuclear. Nuclear will play a role, but there are some practical limitations. Remember, on a national level, we expect we are going to need to add 900 gigawatts of new generation to the grid by 2040. There are only a few nuclear plants that can be recommissioned in an economic way. We are currently evaluating the recommissioning of our Duane Arnold nuclear plant in Iowa as one example. But even with a 100% success rate on those recommissionings, we would still only meet less than 1% of that demand. Existing merchant nuclear generation is also limited in its ability to meet that demand, given there are only approximately 20 merchant nuclear plants in this country.
That nuclear capacity is also not evenly spread across the U.S. And is not in many places. We know hyperscalers are looking to develop data centers or manufacturing — manufacturers are looking to expand their footprint. For example, there are only two merchant nuclear plants west of the Mississippi. Nuclear plants across the country are already serving existing demand. So even if they are contracted by specific customers, new resources need to be built to meet new demand. And alternatives such as new utility scale nuclear and SMRs are unproven, expensive and again, not expected to be commercially viable at scale until the latter part of the next decade.”
7. Yum! Brands, Inc. (NYSE:YUM)
Number of Hedge Fund Investors In Q2 2024: 36
UBS’ Sector Rating: Attractive
Sector: Consumer Discretionary 165
Yum! Brands, Inc. (NYSE:YUM) is one of the biggest restaurant chains in the world. It has a global presence and operates through well-known brands such as KFC, Pizza Hut, and Taco Bell. The firm’s brand image provides it with a key advantage of customer loyalty and recognition which enables it to deliver volume and command global recognition. This has enabled Yum! Brands, Inc. (NYSE:YUM) to amass sizeable financial resources as evidenced by its $6.4 billion in total assets and $7 billion in trailing twelve-month revenue. Since it’s a restaurant chain, Yum! Brands, Inc. (NYSE:YUM) thrives in a robust economy, and when it is able to balance out prices with volume for the perfect target. Additionally, two other key factors that drive the firm’s hypothesis are its ability to keep margins steady through cost control and a globally driven franchise revenue. In today’s environment of slowing global growth (as we alluded to in our introduction) and a strong US dollar, the pressure on Yum! Brands, Inc.’s (NYSE:YUM) flagship US Taco Bell restaurant chain has grown.
Yum! Brands, Inc.’s (NYSE:YUM) management commented on Taco Bell’s performance during the Q2 2024 earnings call:
“Moving on to the Taco Bell division, which represents 37% of our divisional operating profit. US same-store sales grew 5%, outpacing the US QSR industry by a wide margin. Taco Bell executed its winning formula this quarter through introducing a variety of compelling innovations such as the Cheez-It and Secret Aardvark fries. The second quarter also reflected sales contribution from the Cantina Chicken menu, our foray into an elevated chicken offering and a new platform to innovate around.
Since the platform launch, Taco Bell’s chicken sales mix has increased 10 points with nearly one in four orders, including a Chicken Cantina item. Another part of the team’s winning formula is digital in, which digital sales continue to grow at a breakneck pace. In Q2, Taco Bell’s loyalty sales were up over 30%. At Taco Bell International, the team is working on building brand relevance. It is still early days in many markets and trends remain volatile, but we remain confident in the long-term opportunity. A restored emphasis on value has forced our teams to be creative with a more limited national marketing budget. In more mature markets within Europe, which accounts for over 40% of Taco Bell International system sales, we saw encouraging signs of improvement with the introduction of value offers.”
6. Ralph Lauren Corp. (NYSE:RL)
Number of Hedge Fund Investors In Q2 2024: 43
UBS’ Sector Rating: Attractive
Sector: Consumer Discretionary
Ralph Lauren Corp. (NYSE:RL) is one of the most well-known apparel companies in the world. Since it is a high-end fashion company, the firm is dependent quite a bit on a robust economy for its performance. Yet, Ralph Lauren Corp.’s (NYSE:RL) market of the wealthy also insulates it against the cyclical downtrends that tend to drive down other discretionary stocks. This has also driven the stock’s narrative in 2024, with the shares up 39% year to date. The ongoing optimism surrounding a high-end company in a tight economy started in February when Ralph Lauren Corp.’s (NYSE:RL) stock soared by 16.80%. This was due to the firm’s online store adding 1.7 million customers, luxury sales in China growing by 30%, and increased sales from Ralph Lauren Corp.’s (NYSE:RL) own outlets. Combined, these offset the losses that the firm faced in its wholesale divisions. Looking ahead, the firm’s near-term outlook depends on its ability to capitalize on the holiday spending in the US.
While some of Ralph Lauren Corp.’s (NYSE:RL) business divisions have prospered, others, such as US wholesale have struggled. Here’s what management shared during the Q1 2025 earnings call:
“In North America wholesale, revenues decreased 13% as expected, reflecting significantly reduced sales of excess product into the off-price channel and receipt timing shifts previously discussed. Excluding the shifts, our full price sales declined roughly low single-digits, in line with our spring season-to-date sellout trends. Our AUR at wholesale increased modestly, consistent with recent trends, on well-positioned inventories in the channel. Looking ahead, we continue to expect North America wholesale declines to moderate through the remainder of fiscal ’25, with sellout more closely aligning to sell-in, maintaining our ability to chase replenishment on stronger performing core product. Our outlook also includes the planned exit of approximately 45 department store doors this fiscal year, as we continue to proactively evaluate and refine our brand presence on a door-by-door basis.”
5. The Home Depot, Inc. (NYSE:HD)
Number of Hedge Fund Investors In Q2 2024: 86
UBS’ Sector Rating: Attractive
Sector: Consumer Discretionary
Home Depot, Inc. (NYSE:HD) is one of the biggest home improvement retailers in America whose shares have been on quite a ride this year. From the start of 2024 to the first week of September, The Home Depot, Inc.’s (NYSE:HD) stock had gained just 4.34%. Since then, the shares have gained 9% to mark 13.8% in year-to-date gains. The firm, like other tertiary building and construction companies, is sensitive to high interest rates as they constrain consumer home improvement spending and lead to a drop in construction activity. Yet, The Home Depot, Inc.’s (NYSE:HD) scale, as evidenced by its $152 billion in trailing twelve-month revenue and $96.8 billion in total assets places it well to benefit from lower rates and the subsequent pickup in home improvement and building activity. Following the Fed’s 50 basis point rate cut in September, the mortgage market in the US is shifting as refinance applications measured by the Mortgage Bankers Association’s refinance index jumped by 20.3% annually during the week ending on September 20th. This came on the back of lowering mortgage rates, and future movements could unlock The Home Depot, Inc.’s (NYSE:HD) weak market.
Polen Capital mentioned The Home Depot, Inc. (NYSE:HD) in its Q2 2024 investor letter. Here is what the fund said:
“In the second quarter, the top relative contributors to the Portfolio’s performance were all names we do not hold: The Home Depot, Inc. (NYSE:HD), Meta Platforms, and AbbVie. With Home Depot, much of the quarter’s weakness came in April, as a higher-than-expected inflation reading caused investors to question the likelihood of imminent rate cuts in 2024. Given Home Depot’s sensitivity to interest rates, as it relates to home improvement projects, the stock sold off in the period.”
4. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Investors In Q2 2024: 219
UBS’ Sector Rating: Attractive
Sector: Communications Services
Meta Platforms, Inc. (NASDAQ:META) is the firm that owns and operates Facebook, WhatsApp, and Instagram. Its user base of 3.2 billion makes it one of the biggest in the world. It also makes Meta Platforms, Inc. (NASDAQ:META) indispensable to the global advertising industry, with the firm relying on advertiser revenue for most of its sales. As of H1 2024, 98% of Meta Platforms, Inc.’s (NASDAQ:META) $75.5 billion in revenue came through advertising. Consequently, the firm tends to perform well when economic output is high and businesses have a greater ability to spend on marketing. Additionally, its dominance in the social media industry has lent Meta Platforms, Inc. (NASDAQ:META) sizable resources of $32 billion in cash and equivalents. These, in turn, have enabled it to establish a foothold in the artificial intelligence industry and develop a foundational AI model. The billions that Meta Platforms, Inc. (NASDAQ:META) has invested in AI mean that generating AI profits is now a key part of its hypothesis. This is through its advertising AI features for businesses, and consumer-facing AI features that involve image editing. Additionally, another central tenet of Meta Platforms, Inc.’s (NASDAQ:META) hypothesis is its AI spending. The more the firm spends, the less money it can allocate for other plans, and investor expectations of a return also grow. This was evident after Meta Platforms, Inc.’s (NASDAQ:META) Q3 earnings that saw shares drop by 3% after it upgraded 2024 CapEx spending to $38 billion to $40 billion from an earlier $37 billion to $40 billion.
Polen Capital mentioned Meta Platforms, Inc. (NASDAQ:META) in its Q2 2024 investor letter. Here is what the fund said:
“Meta Platforms delivered robust results in the period, with revenue growth accelerating in the first quarter. However, revenue comparisons for Meta will become more difficult from here, and its guidance for 2Q revenue fell below market expectations. After the company’s “year of efficiency,” where it cut costs in its core business, management is now indicating another ramp-up in GenAI and metaverse spending, spurring concerns about future profit margins. Metaverse spending, by our calculations, is now over $20 billion per year with little to no expected return on the foreseeable horizon.”
3. Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Investors In Q2 2024: 107
UBS’ Sector Rating: Most Attractive
Sector: Information Technology
Adobe Inc. (NASDAQ:ADBE) is a global leader and brand name when it comes to productivity software products. The firm develops and sells some of the most well-known software in the world such as Photoshop and Reader. Its shares have been quite dynamic this year, with the stock dipping by 21% between January and June only to soar by 27.6% by mid-September and then sink again by 18%. As should be evident, the stock’s roller-coaster ride has been driven by artificial intelligence. Throughout the course of 2024, investors have reacted based on their perception of Adobe Inc.’s (NASDAQ:ADBE) ability to integrate AI through its product portfolio and then retain and grow subscribers based on AI to generate profits. Consequently, its latest share price dip in September which saw the shares sink by 13% came after Adobe Inc.’s (NASDAQ:ADBE) fourth-quarter midpoint EPS guidance of $4.655 and midpoint revenue of $5.25 billion fell below analyst estimates of $4.67 in EPS and $5.61 billion in revenue As a result, investors calibrated their optimism surrounding Adobe Inc.’s (NASDAQ:ADBE) AI potential.
Polen Capital mentioned Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter. Here is what the fund said:
“With Adobe, in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
2. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Investors In Q2 2024: 117
UBS’ Sector Rating: Most Attractive
Sector: Information Technology
Salesforce, Inc. (NYSE:CRM) is a software-as-a-service company that focuses on managing the needs of the customer relationship management industry. This means that the firm’s hypothesis is dependent on industry level and firm-specific factors. Starting from the former, Salesforce, Inc. (NYSE:CRM) depends on its ability to sustain and grow recurring revenue and sales along with cost control to drive margins. Its firm-specific performance is tied to the economy, with Salesforce, Inc. (NYSE:CRM) performing well when lower rates and inflation enable businesses to allocate more resources for marketing spend. Consequently, the stock is up by a tepid 15.7% year to date as the economy has continued to remain tight. However, Salesforce, Inc. (NYSE:CRM) benefits from its sizeable industry presence. It commanded a 21.7% market share in 2023 and provides customers with a whopping 8 trillion data points to develop their strategies and decisions.
Salesforce, Inc. (NYSE:CRM) also depends on its ability to land large deals as it allows it to drive recurring revenue and boost margins. Here’s what management shared 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.”
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Investors In Q2 2024: 279
UBS’ Sector Rating: Most Attractive
Sector: Information Technology
Microsoft Corporation (NASDAQ:MSFT) is the world’s largest software provider. The firm enjoys a commanding and sizeable position in the consumer and enterprise software industries. Microsoft Corporation’s (NASDAQ:MSFT) Windows is the world’s most widely used consumer operating system, and its Azure platform enjoys a commanding position in the cloud computing market. Microsoft Corporation’s (NASDAQ:MSFT) stature has allowed it to become a global financial behemoth with cash and equivalents of $18 billion and total assets of $512 billion as of its latest quarter. These, in turn, have allowed it to gain a strong foothold in the frontier of the global software industry called artificial intelligence. Microsoft Corporation’s (NASDAQ:MSFT) sizeable stake in OpenAI allows it to access one of the world’s leading foundational AI models. This enables it to revamp its cloud computing business with AI offerings to improve customer experience. Consequently, AI sits dead center in Microsoft Corporation’s (NASDAQ:MSFT) hypothesis, and the firm’s ability to profit from its AI products should influence the share price due to the billions that it has invested in the industry. This was evident following Microsoft Corporation’s (NASDAQ:MSFT) fiscal Q1 earnings which saw it guide Q2 revenue at a high end of $69.1 billion. Since analysts were expecting $69.83 billion, the shares fell by 3.7% in aftermarket trading.
Baron Opportunity Fund mentioned Microsoft Corporation (NASDAQ:MSFT) in its Q3 2024 investor letter. Here is what the fund said:
“Microsoft was traditionally known for its Windows and Office products, but over the last five years it has built a $147 billion run-rate cloud business, including its Azure cloud infrastructure service and its Office 365 and Dynamics 365 cloud-delivered applications. Shares gave back some gains from strong performance over the first half of this year. For the fourth quarter of fiscal year 2024, Microsoft reported a strong quarter with total revenue growing 16%, in line with the Street; Microsoft Cloud up 22%; Azure up 30%; 43% operating income margins; and 36% free cash flow margins. Core Azure growth came in one point shy of expectations, however, due to a soft European market and continued constraints on AI compute capacity. In the same vein, while Microsoft reiterated its fiscal 2025 targets of double-digit top-line and operating income growth, quarterly guidance called for Azure growth to slow a bit before accelerating in the back half of the fiscal year, as capital expenditures increase, yielding an expansion of AI compute capacity. We believe this investment is a leading indicator for growth, with more than half of the spend related to durable land and data center build outs, which should monetize over the next 15-plus years. We remain confident that Microsoft is one of the best-positioned companies across the overlapping software, cloud computing, and AI landscapes, and we remain investors.”
MSFT is a top stock in the AI and growth era according to UBS. While we acknowledge the potential of MSFT as an investment, 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 MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and insiders. Please subscribe to our free daily e-newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
