In this piece, we will take a look at the top stocks with improving earnings revisions, P/E ratios, EPS growth, and other indicators according to investment bank UBS.
With the third quarter of the 2024 earnings season underway, Wall Street is dealing with a changing stock market environment. The Federal Reserve has started its interest rate reduction cycle and market watchers are on the lookout for labor market and inflationary indicators to determine whether the Fed will be able to meet its goal of reducing interest rates by an additional 50 basis points by the end of this year.
Simultaneously, the shifting economic climate is also creating changes in the investment environment. High interest rates traditionally do not mean well for certain stock market sectors barring exceptional circumstances. Some sectors that don’t perform well in a high-rate environment include real estate, healthcare, and technology.
For two of these, this has been the case in the 2022 – 2024 Federal Reserve interest rate hiking cycle as well. Starting from real estate, the flagship S&P index’s real estate sector’s annualized three-year return is currently -2.66%. From its peak of 324.75 in December 2021, the index has lost 48.2 points or 14.8%. Similarly, the high-end healthcare and biotechnology sector does not fare well during high interest rates either. Since 2021’s close, the S&P’s pharmaceutical stock index is down by -0.84% while the S&P’s biotechnology index has lost a sizable 12.61%.
This brings us to our third stock market sector, a.k.a, technology. Technology, as you’re likely aware, has seen a lot of investor interest due to the surge in artificial intelligence. Looking at the performance of the S&P’s technology stock index, its performance also mirrors real estate and healthcare stocks before the frenzy around artificial intelligence started. Between 2021’s close and the market’s bottom in October 2022, the index had lost 33%. During the same time period, the real estate, pharmaceutical, and biotechnology stock indexes had lost 34.8%, 12.2%, and 30.5%, respectively. However, market optimism surrounding artificial intelligence has created a clear bifurcation in performance.
As an example, while real estate stocks have gained 29% since the October 2022 bottom and biotechnology stocks have added 25% in value, information technology stocks are up by a whopping 115%. This shows that tech stocks have delivered 4x the returns of both real estate and biotechnology. Driving this is artificial intelligence, with the shares of the world’s premier AI GPU designer up by 690% since OpenAI publicly released ChatGPT.
Looking at these shifts, the next question to ask is which stock market sectors might benefit from the evolving environment moving forward. On this front, investment bank UBS has some insights. In its Equity Compass Report issued in mid-October, the bank identifies key themes and trends for US and global stock markets. Within global and US stock market sectors, the bank has rated only one sector as ‘Most Attractive’. Unsurprisingly, this is the US technology sector which is currently experiencing a sustained surge of investor optimism courtesy of artificial intelligence.
The bank shares several data points to justify its optimism in the US technology sector, and more specifically, artificial intelligence companies. Citing data from the Hugging Face repository, a collection of software development tools, it reveals “an average 200% y/y rise for new AI models and model downloads combined so far in 2024.” UBS is also optimistic about the growing adoption of artificial intelligence in the US business world. AI adoption is key since big technology firms that have invested billions of dollars in AI need it to generate returns on their investment.
As per UBS, data from the Census Bureau’s Business Trends and Outlook (BTOS) survey released in September 2024 shows that AI adoption across the 1.2 million firms tracked was picking up the pace. “In the survey, 5.9% of companies reported using AI as of 3Q24, up from 3.7% in 3Q23,” outlined the bank in its report. Not only did 5.9% of the firms adopt AI, but the survey’s outlook for the next six months revealed that AI adoption across the surveyed population could rise by 2.8 percentage points to sit at 8.7%. Commenting on the implications of the higher adoption, UBS stated that “increasing future adoption will increase visibility on AI monetization, which is consistent with recent comments from leading cloud platforms.” The firms slated to benefit the most from this monetization are those ” with strong footprints in existing customer bases,” believes the bank.
These statements necessitate asking the question of which industries are slated to benefit the most from AI adoption. Fortunately for us, UBS also shares data for the industries currently leading the way with AI adoption and those that could grow adoption in the future. Right now, the information technology and personal services sectors are leading with AI adoption since as of September 2024, their respective adoption percentages were 19.1% and 14.7%. For the next six months, while the same industries are expected to lead the pack in overall AI adoption through their 23% and 19.8% percentages, others are expected to make higher percentage point gains. Two industries that stand out in the report are educational services and the finance and insurance industries.
As per the report, the former is expected to increase its AI adoption by 5.6 percentage points to 18.7% over the next six months from the current value of 13.1%. For the finance and insurance sector, it is expected to mark a 6.2 percentage point jump to 13.4% from the existing AI adoption of 7.2%. Of course, while AI is by far the most popular sector in the market right now, UBS also shares other attractive areas. It outlines that the market “also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
With these details in mind, let’s take a look at the stock stocks that are seeing improving indicators according to UBS.
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Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds invested in the firms.
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).
33. Dayforce Inc (NYSE:DAY)
Number of Hedge Fund Investors In Q2 2024: 23
Sector: Industrial
Dayforce Inc (NYSE:DAY) is a business software company that enables customers to manage their human resources, payroll, tax, benefits, and other operations. Consequently, its hypothesis is dependent on the state of the labor market and by extension the economy. As a result, it’s unsurprising that the shares have gained a modest 13.9% year to date. In fact, if it weren’t for a 15% share price jump in October, Dayforce Inc (NYSE:DAY)’s stock would be down 1% year to date. So what happened in October? Well, the firm’s fiscal third-quarter revenue and EPS of $440 million and $0.47 beat analyst estimates of $428.3 million and $0.43, and its 2025 midpoint growth guidance of 14.5% also surpassed estimates of 13.1%. Yet, Dayforce Inc (NYSE:DAY)’s fourth quarter guidance miss led to some turbulence as the stock sank by 6% following the release.
Dayforce Inc (NYSE:DAY)’s management is quite optimistic about the demand for its software products. Here’s what they shared during the Q3 2024 earnings call:
“Organizations recognize that adopting a modern and best-in-class HCM system can yield significant benefits. These benefits stem from replacing as many as 12 disparate systems with the Dayforce platform. Drilling down into our sales during the quarter, we did see instances of elongated sales. There was no specific industry or segment where this was more pronounced. However, we continued to have strong confidence in our fourth quarter guidance, underscored by our go live plans, our expanding sales motion to our existing customer base and more full-suite deals. Our Q4 pipeline remains strong, with a coverage ratio of sales opportunities to sales targets of approximately 4x. We believe the pipeline strength is a result of our key growth drivers, including the expansion of the Dayforce platform to include a broad set of HCM offerings, our move upmarket to target and win large customers, building the system integrated channel, which allows us to leverage our partners’ implementation and sales capabilities, and finally, building the foundation to win and serve global clients.”
32. Stanley Black & Decker, Inc. (NYSE:SWK)
Number of Hedge Fund Investors In Q2 2024: 24
Sector: Industrial
Stanley Black & Decker, Inc. (NYSE:SWK) is a global tools and engineered products giant. It caters to the needs of the everyday consumer and large companies. Its global presence and brand name have enabled Stanley Black & Decker, Inc. (NYSE:SWK) to develop sizable financial resources. These are evident through its trailing twelve-month revenue of $15.4 billion and inventory of $4.7 billion. Yet, the industrial and cyclical nature of its end market means that Stanley Black & Decker, Inc. (NYSE:SWK) does well when rates are low and consumer spending is robust. Consequently, the fact that the stock is down 4.9% year to date is unsurprising. The aftermath of Stanley Black & Decker, Inc. (NYSE:SWK)’s third-quarter results was particularly notable as the shares dipped by 8.8%. This came as the firm’s industrial business saw revenue drop by 18% annually to $488 million and revenue dipped by 5% to $3.75 billion and missed analyst estimates of $3.80 billion.
Ariel Investments mentioned Stanley Black & Decker, Inc. (NYSE:SWK) in its Q3 2024 investor letter. Here is what the fund said:
“Several stocks in the portfolio delivered solid returns in the quarter. Shares of Stanley Black & Decker, Inc. (NYSE:SWK) outperformed following robust quarterly earnings results as well as a subsequent increase in full year guidance. The Tools and Outdoor segment posted positive organic revenue growth for the first time since late 2021. Meanwhile, SWK’s transformation initiatives remain on track. The company delivered margin expansion by realizing savings from sourcing initiatives, productivity improvements and cost efficiencies. Though the macroeconomic backdrop remains challenging, management is cautiously optimistic lower interest rates will drive a recovery in consumer demand. We have conviction in SWK’s experienced executive management team and think the balance sheet is well positioned to weather the storm.”
31. Cummins Inc. (NYSE:CMI)
Number of Hedge Fund Investors In Q2 2024: 38
Sector: Industrial
Cummins Inc. (NYSE:CMI) is an American heavy-duty industrial products company that makes and sells a variety of equipment such as engines and powertrains. This leaves the firm vulnerable to a downturn in industrial spending that is typically driven by higher rates and lower activity. However, Cummins Inc. (NYSE:CMI)’s stock has been a standout in 2024 and is up by 36% year to date which is more than 2x the S&P Industrial sector’s 17%. This optimism is partially driven by the firm’s ability to capture benefits from new EPA rules that are expected to go into effect in 2027. These can lead to advanced demand for several Cummins Inc. (NYSE:CMI)’s products in 2025 and 2026 as businesses take advantage of the existing rules to beef up their fleets. Cummins Inc. (NYSE:CMI) is also aggressively investing in clean energy products such as clean diesel and natural gas engines. These could prove to be important for the firm in the long run.
Cummins Inc. (NYSE:CMI)’s management shared details about its clean energy 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.”
30. AvalonBay Communities, Inc. (NYSE:AVB)
Number of Hedge Fund Investors In Q2 2024: 34
Sector: Real Estate
AvalonBay Communities, Inc. (NYSE:AVB) is a residential real estate company. The firm owns and operates close to a hundred thousand apartment homes in major US cities. Its shares have gained a modest 14.9% year to date as work-from-home trends and high rates have constrained the residential real estate market in major cities. Additionally, AvalonBay Communities, Inc. (NYSE:AVB) has also faced trouble in the Southern region of the US, where higher construction activity has inundated the market with properties and led to lower rent rates and depressed prices. For firms like AvalonBay Communities, Inc. (NYSE:AVB) which rely on debt to finance their properties this means that lower rent income stresses the balance sheet and constrains the ability to grow their property portfolio.
Baron Real Estate Fund mentioned AvalonBay Communities, Inc. (NYSE:AVB) in its Q2 2024 investor letter. Here is what the fund said:
“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. (NYSE:AVB). 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.
Equity Residential and AvalonBay each own approximately 80,000 apartment homes primarily in coastal markets. We believe these portfolios offer superior long-term growth prospects due to:
Favorable long-term demographic trends driven by strong population and job growth in their key geographic markets An undersupply of housing in the U.S. with outsized cost of ownership versus renting in their respective markets A high-earning, well-employed resident profile with attractive rent-to-income ratios allowing for future pricing power Low levered balance sheets which may present attractive opportunities for accretive external growth…” (Click here to read the full text)
29. Federal Realty Investment Trust (NYSE:FRT)
Number of Hedge Fund Investors In Q2 2024: 24
Sector: Real Estate
Federal Realty Investment Trust (NYSE:FRT) is a Maryland-based real estate investment trust that invests in retail properties such as shopping centers. This means that the firm is heavily exposed to consumer spending trends, inflation, and economic health when compared to other REITs such as those that invest in residential real estate. Consequently, Federal Realty Investment Trust (NYSE:FRT)’s shares are up by a modest 5.70% year to date, and were it not for a 6% share price gain in July, the shares would be down 3.7% year to date. This indicates the extent to which the Federal Realty Investment Trust (NYSE:FRT)’s hypothesis depends on the consumer spending environment. Additionally, the firm also does well when inflation is low as the costs of maintaining its portfolio drop. Lower costs are another driver of Federal Realty Investment Trust (NYSE:FRT)’s hypothesis due to its sizable portfolio made of $10.2 billion of operating real estate at costs. Higher costs reduce the firm’s ability to pay dividends, which are a key primary attractive point of real estate stocks.
Here’s what Federal Realty Investment Trust (NYSE:FRT)’s management believes is in store for it for 2025:
“First, prior period rents from COVID-era deferral agreements will wind down to essentially zero in 2025 from $3 million in 2024. Second, as tenants are reluctant to give back space in the current environment, term fees should be light for a second consecutive year, essentially flat to 2024. Capitalized interest will fall to the mid-teens as we place more of our significant $850 million development pipeline into service over the year. And we expect our credit reserve to be more normalized for 2025, given the expectation of a moderating economy. Use our historical average of roughly 100 basis points as a placeholder for now. Although currently, we do not see any significant near-term risks in the watch list as of today. On the positive side of the ledger, as outlined previously in our remarks, occupancy growth should continue upwards, likely towards 95% over the course of the year.
Additionally, rent growth from sector-leading contractual bumps and strength in rollover should continue, as well as upside from recent acquisitions and contributions from the delivery of space in the redevelopment pipeline. All of these will more than offset any headwinds and fuel continued momentum in our bottom line FFO per share growth into 2025.”
28. Simon Property Group, Inc. (NYSE:SPG)
Number of Hedge Fund Investors In Q2 2024: 38
Sector: Real Estate
Simon Property Group, Inc. (NYSE:SPG) is a mid-sized REIT that invests in retail and hospitality properties such as restaurants and malls. Since nearly 90% of its revenue is based on lease income, the firm depends heavily on economic activity for its fortunes. However, within its lease income of $2.6 billion as of H1 2024, nearly 81% came from fixed leases. These are less susceptible to market downturns and insulate Simon Property Group, Inc. (NYSE:SPG) against cyclical shocks of a weak retail real estate industry. As a whole, the firm’s shares depend on consumer spending and discretionary income. These, in turn, are dependent on economic growth and lower inflation. Simon Property Group, Inc. (NYSE:SPG) also benefits from a well-developed real estate portfolio, which includes several malls capable of generating $100 million or more net operating income (NOI).
During the Q2 2024 earnings call, Simon Property Group, Inc. (NYSE:SPG)’s management commented on the trends that it’s observing in the retail real estate space:
“We signed more than 1,400 leases for approximately 4.8 million square feet in the quarter. Approximately 30% of our leasing activity in the second quarter was new deal volume. Our traffic in the second quarter was up 5% compared to last year. And importantly, total sales volumes increased approximately 2% year-over-year. Reported retailer sales per square foot in the second-quarter was $741 for the mall and premium outlets combined.
We hosted our third Annual National Outlet Shopping Day in June, and it was very successful for shoppers and for participating retailers. More than 3 million shoppers visit our premium outlets and mill centers over the shopping weekend. Feedback from shoppers and retailers following the event has been great. Since launching this unique event three years ago, participating retailer and shopping momentum has built each year with more than 475 retailers this year, and we look forward to an even bigger event next year. Our occupancy cost at the end of the second quarter was 12.7%.”
27. ONEOK, Inc. (NYSE:OKE)
Number of Hedge Fund Investors In Q2 2024: 34
Sector: Energy
ONEOK, Inc. (NYSE:OKE) is an American midstream oil and gas company that deals with natural gas and liquefied natural gas (LNG). The firm gathers, stores, processes, and sells natural gas and associated fuels. However, despite the fact that the natural gas industry in the US has faced weakness in 2023 due to lower prices and excess supply, ONEOK, Inc. (NYSE:OKE)’s shares have gained 31.5% year to date. These gains have been influenced by a robust acquisition strategy which has seen the firm grow its operations by acquiring two midstream firms. Analysts expect that the deals have the potential to add up to $2 billion to ONEOK, Inc. (NYSE:OKE)’s operating income and grow its free cash flow by 20% by 2028. As a result, the share price gains reflect the growing optimism surrounding the firm. On a macro front, continued recovery in the natural gas market can create tailwinds for ONEOK, Inc. (NYSE:OKE), while an economic slowdown can generate headwinds.
ONEOK, Inc. (NYSE:OKE)’s management commented on its acquisitions during the Q3 2024 earnings call:
“Our stand-alone 2024 adjusted EBITDA guidance, which excludes contributions from EnLink and Medallion, is well over double ONEOK’s adjusted EBITDA just five years ago. This extraordinary growth has been possible because of our employees’ focus on excellence, service and innovation, our strategic assets and our intentional and disciplined approach to organic growth and acquisitions. It has been more than a year since we completed the acquisition of Magellan, and we continue to identify synergy opportunities related to the transaction exceeding our original expectations. In mid-October, we completed our acquisition of the controlling [indiscernible] EnLink Midstream. And today, I’m able to announce the expiration of the Hart-Scott-Rodino Act waiting period related to the Medallion acquisition.
We look forward to finalizing that acquisition in the coming days. The EnLink and Medallion acquisitions continued to build off the complementary assets of ONEOK, providing significant growth potential by establishing a fully integrated Permian Basin platform at scale that will drive new service offerings for our customers. Expanding and extending ONEOK’s footprint in the Mid-Continent and North Texas, providing a new asset position in Louisiana connected with the key demand centers providing significant synergies through connections of complementary asset positions and finally, delivering immediate accretion in supporting our capital allocation strategy. These acquisitions mark another exciting milestone in our company’s history, building on our proven track record of shareholder value creation.”
26. EOG Resources, Inc. (NYSE:EOG)
Number of Hedge Fund Investors In Q2 2024: 42
Sector: Energy
EOG Resources, Inc. (NYSE:EOG) is a mid-sized American oil and gas exploration and production firm headquartered in Houston, Texas. As a result, the firm’s narrative depends on its ability to maintain volume production and keep costs low to ensure it can compete with rivals. A weak global oil market in 2024 led by a slowdown in China has made its impact on EOG Resources, Inc. (NYSE:EOG)’s shares as well and led the shares to shed -0.62% year to date. However, the firm is capitalizing on a weak market by expanding its production. This strategy ties into its hypothesis, with two key regions for EOG Resources, Inc. (NYSE:EOG)’s growth being its Utica and Dorado plays. The firm is also expanding its Delaware Basin portfolio by opening a 300 million cubic feet gas processing plant in 2025 to help it manage costs and gain market share in the lucrative Houston market. Consequently, EOG Resources, Inc. (NYSE:EOG) can see tailwinds contingent on the successful execution of these strategies.
EOG Resources, Inc. (NYSE:EOG)’s management shared details about its Utica and Dorado operations during the Q2 2024 earnings call:
“Our large contiguous acreage position in the Utica lends itself to developing a long-life, repeatable, low-cost play competitive with the premier unconventional plays across North America. For 2024, we are on target to complete 20 net wells in the Utica across our northern, central and southern acreage, which supports a full rig program and enables significant well cost reductions. In Dorado, we continue to leverage the operational flexibility provided by our multi-basin portfolio to moderate and manage activity through the summer. Earlier this year, we decided to defer completions while retaining a full rig program to maintain operational momentum. As a result, the drilling team has achieved a 13% increase in drilled feet per day year-to-date.
Maintaining a steady drilling program allows us to capture corresponding efficiencies in advance and improve the play, while we continue to monitor the natural gas market. Gas prices are improving into the second half of the year, and we remain flexible to respond to the market. As the year unfolds, we will continue to maintain capital discipline and leverage the flexibility of our multi-basin portfolio to ensure consistent execution across all operating areas. We also remain highly focused on sustainable cost reductions through innovation, operational performance and efficiency improvements to further drive down our cost structure and expand EOG’s capacity to generate free cash flow.”
25. Targa Resources Corp. (NYSE:TRGP)
Number of Hedge Fund Investors In Q2 2024: 39
Sector: Energy
Targa Resources Corp. (NYSE:TRGP) is a natural gas infrastructure company based in Houston, Texas. However, it is a unique gas infrastructure play in the sense that the shares are up a whopping 91% year to date. This strong performance has come at a time when over-supply in the US gas market has led to depressed prices. Amidst this turmoil, Targa Resources Corp. (NYSE:TRGP) has benefited from the fact that it is one of the biggest gas infrastructure providers in America’s Permian Basin. Permian is the hub of the US shale oil industry, and as the saying goes, where there’s oil, there’s gas as well. Targa Resources Corp. (NYSE:TRGP) has benefited from the Permian Basin’s growing share of the US natural gas market. This is evident by the fact that in 2011, the region accounted for 5.8% of US gas production and this grew to 18.6% in 2022. Targa Resources Corp. (NYSE:TRGP) benefits from its added presence in the natural gas marketing industry which enables it to gauge demand fluctuations ahead of time and adjust supply accordingly.
Targa Resources Corp. (NYSE:TRGP)’s management shared the following about the Permian Basin during the Q2 2024 earnings call:
“Activity in the Permian remains very strong, supporting our view of continued long-term growth from the basin. Our Permian volumes during the second quarter increased about 275 million cubic feet per day over the first quarter, which is a full plant. And year-over-year, our volumes in the Permian are up more than 600 million cubic feet per day. And currently, our volumes in the Permian are up another 200 million cubic feet per day compared to the second quarter. We expected strong growth from our Permian assets, but the growth we have seen this year has exceeded our expectations.
We now expect low double-digit percentage volume growth this year, which sets us up well for meaningful growth in 2025 and beyond. This higher growth rate is driving incremental EBITDA and requiring additional growth capital investment. These volumes are core to our business, and we benefit across the integrated NGL value chain, driving higher margins into our downstream business and generating strong ROIC. Given higher-than-anticipated Permian volumes and an outlook for continued strong activity across our Midland and Delaware footprint, we announced our next two plants in the Permian, one in the Midland Basin and another in the Delaware Basin. Some spending for these plans was included in the forecast we provided back in February, but the timing and cadence of spending has accelerated.”
24. Bunge Limited (NYSE:BG)
Number of Hedge Fund Investors In Q2 2024: 26
Sector: Consumer Staples
Bunge Limited (NYSE:BG) is a sizable American food company that is the world’s largest oilseed processor. It has a diversified business model which enables the firm to target the commodity, food oil, bakery, and other industries. Consequently, Bunge Limited (NYSE:BG)’s shares depend quite a bit on the state of the US agricultural and farm industry. This makes it unsurprising that the shares are down 18.6% year to date since the farm sector is dealing with demand and supply mismatches that have led to reduced output and pricing volatility. Bunge Limited (NYSE:BG)’s shares tanked by a massive 16.7% in late July and early August due to the firm’s exposure to the corn market. This meant that the firm’s EPS of $1.73 for its June quarter missed analyst estimates of $1.80. Consequently, Bunge Limited (NYSE:BG)’s hypothesis now depends on the broader corn and soybean market as well as its $36 billion bid to acquire Viterra.
Bunge Limited (NYSE:BG)’s management commented on the Viterra affair during the Q3 2024 earnings call:
“We’re making great progress on integration planning for our announced combination with Viterra. The teams are working well together, confirming our confidence that we will be more complete as one combined company. Their commitment will ensure that we can effectively serve our customers from day one. We also continued to engage with the relevant authorities as we work towards gaining a few remaining regulatory approvals.
Since our last call, we received conditional clearance from the European Commission and we’re well through the process of meeting the conditions. Conversations in other jurisdictions are constructive. We do not see any issues that would materially impact the economics of the deal. We expect to close the transaction later this year or early 2025.”
23. Kroger Co (NYSE:KR)
Number of Hedge Fund Investors In Q2 2024: 46
Sector: Consumer Staples
Kroger Co (NYSE:KR) is a diversified American retailer that sells groceries, self-branded food products, and drugs all over the United States. With 2,750 outlets all over the US, it is one of the biggest retailers of its kind and benefits from deep market penetration and high volumes necessary to drive margins in the consumer goods industry. While its scale offers Kroger Co (NYSE:KR) unique advantages when it comes to competing in the grocery retail industry, it also places the firm at risk from disruption by eCommerce stores. Consequently, digital sales are a key driver of its narrative. This was evident following Kroger Co (NYSE:KR)’s second-quarter earnings when the firm beat EPS estimates of $0.91 by posting $0.93, but the beat was driven by its digital business which grew sales by 11% annually. The stock was up 7.2% following the earnings and might see some turbulence down the road if Kroger Co (NYSE:KR)’s merger with Albertsons faces regulatory hurdles.
Kroger Co (NYSE:KR)’s management commented on the deal during the Q2 2024 earnings call:
“Before I open it up for Q&A, I’d like to speak briefly about our pending merger with Albertsons. First, I would like to express my appreciation for our associates and their incredible commitment. It has been a long journey, and our associates have done an excellent job serving customers and running the day-to-day operations of our business, while also preparing for the merger. Integration work continues to progress, and our teams are laser-focused on ensuring a seamless transition for our customers and associates from day one. It is exciting to see the complementary strengths of both Kroger and Albertsons organizations, and we look forward to combining these strengths to provide customers an even better experience.
As part of our merger preparation, Kroger recently launched an exchange offering for Albertsons notes, contingent upon the closing of the merger as well as a successful new offering for $10.5 billion of senior unsecured notes with the net proceeds expected to fund a portion of the cash consideration for the proposed merger. A portion of the proceeds of this offering is subject to a special mandatory redemption if the merger does not close. As the preliminary injunction trial with the FTC nears its conclusion, we are confident in the facts and the strengths of our position. The retail industry continues to be more competitive, and we know how our customers shop. Every day, they are making decisions on where to eat and where to buy their groceries.”
22. Target Corporation (NYSE:TGT)
Number of Hedge Fund Investors In Q2 2024: 52
Sector: Consumer Staples
Target Corporation (NYSE:TGT) is one of the biggest discount retailers in the US. It benefits from a wide retail presence courtesy of more than two thousand retail locations. These provide Target Corporation (NYSE:TGT) with the depth of market penetration and enable it to drive volumes which are key to sustaining margins in the consumer goods industry. Being a discount retailer helps it benefit from a sales uptick when inflation is rising and also when it’s dropping. Target Corporation (NYSE:TGT) is also using the reduced inflationary environment to drive volumes. For instance, its shares jumped by 10% in August following Q2 revenue and earnings beat. Target Corporation (NYSE:TGT)’s Q2 revenue of $24.45 billion and EPS of $2.57 both beat analyst estimates and the firm also raised full-year midpoint EPS guidance to $9.35 from an earlier $9.10.
Since it relies on discretionary spending to a large extent, here’s what Target Corporation (NYSE:TGT)’s management shared during the Q2 2024 earnings call:
“Within our assortment in Q2, we saw notable areas of strength in both discretionary and frequency categories. As Brian highlighted, discretionary trends have been improving for a full year now, and combined discretionary comps were down only slightly in Q2. This momentum was most evident in our apparel assortment, which delivered low single-digit comp growth driven by newness in combination with strong everyday value, both in-stores and online. Comps were led by a performance category in the low double-digits as guests loved our latest designs and unbeatable prices in our All in Motion brand. Women’s apparel saw growth in the low to mid-single-digits with particular strength in our young contemporary owned brand Wild Fable. And a recent relaunch of our intimate and sleepwear brand, Auden, has seen a strong guest reaction out of the gate, offering high quality and comfortable items at compelling price points, like $15 bras and $20 pajama sets.
These results demonstrate the broad-based improvements that we’re seeing in apparel, a trend we are eager to build on in the coming quarters and years.”
21. W. R. Berkley Corporation (NYSE:WRB)
Number of Hedge Fund Investors In Q2 2024: 31
Sector: Financials
W. R. Berkley Corporation (NYSE:WRB) is one of the biggest insurance underwriters in America. It is a well-diversified insurance company that benefits from sizable premium contributions from casualty, short tail, and auto premiums. As of H1 2024, these three segments accounted for 41%, 20%, and 14.6% of W. R. Berkley Corporation (NYSE:WRB)’s net premiums, respectively. This makes it clear that the firm depends to a large extent on the property and casualty market for its financial well-being. Consequently, W. R. Berkley Corporation (NYSE:WRB)’s future depends on the firm’s ability to navigate the current climate change-driven disruptions that the casualty insurance market is facing. The firm took a sizable $98 million hit from Hurricane Helene in its Q3, and after it released the results, W. R. Berkley Corporation (NYSE:WRB)’s shares dropped by 4%. On the auto insurance front, the firm focuses exclusively on the commercial market which makes it vulnerable to economic slowdowns and social inflation but also carries the promise of sizable premiums through insuring large fleets.
During the Q3 2024 earnings call, W. R. Berkley Corporation (NYSE:WRB)’s management shared details of climate catastrophes on its business:
“During the quarter there were four hurricanes that made landfall, with Helene being the most destructive across several states and continuing SCS activity that contributed modestly to the total amount of CAT losses. Our net premiums written grew above $3 billion for the second consecutive quarter and continues to benefit our record net premiums earned, which increased 10.8% over the prior year. Current accident year underwriting income, excluding CATs, increased 13.4% to $362 million pre-tax, adjusted for CAT losses of $98 million and prior year favorable development of $1 million. Our current accident year loss ratio, ex-CAT, improved quarter-over-quarter by [1.5] (ph) to 59.1% driven by business mix. We continue to invest in the business to drive efficiencies and better experience for our customers combined with new startup operating units that we’ve announced before.
The combination of these items along with the changes in business mix and reinsurance structures have contributed to the increase in our expense ratio by 20 basis points to 28.5%. As previously communicated, we continue to believe that our expense ratio should remain comfortably below 30%.”
20. MetLife, Inc. (NYSE:MET)
Number of Hedge Fund Investors In Q2 2024: 37
Sector: Financials
MetLife, Inc. (NYSE:MET) is one of the biggest insurance companies in the world. Along with insurance, the firm also offers pension benefits, retirement benefits, and other products. Premiums account for the biggest chunk of MetLife, Inc. (NYSE:MET)’s revenue. As of H1 2024, 64% of the firm’s revenue came from premiums, which makes it vulnerable to any constraints in its ability to raise premiums. Yet, unlike several other insurance companies, MetLife, Inc. (NYSE:MET) also generates a sizable portion of revenue from investment income. During H1 2024, 31% of the firm’s revenue came from investment income. Consequently, premiums and investment income form a key part of MetLife, Inc. (NYSE:MET)’s hypothesis. Investment income benefits from high interest rates, and the firm’s biggest profit earner is its Group Benefits business which provides vision, accident, and health insurance products to business employees. This dependence led to a 5.7% share price drop in October after MetLife, Inc. (NYSE:MET)’s Q3 results which saw Group Benefits earnings drop by 11% annually.
During the Q3 2024 earnings call, MetLife, Inc. (NYSE:MET)’s management commented on its Group Benefits business. Here is what they shared:
“Shifting to business segment results. Our Group Benefits business reported adjusted earnings of $431 million excluding notable items, down from a strong underwriting quarter a year ago. On a year-to-date basis also excluding notable items adjusted earnings are up 7%. Our scale and broad product range have long been points of competitive differentiation for our Group Benefits business, contributing to our adjusted premiums, fees and other revenue growth. In the quarter, adjusted PFOs, excluding the [Technical Difficulty] policies, rose 5.3%. For the year-to-date period, adjusted PFOs on the same basis similarly grew 5.5%. With employee benefits enrollment season again upon us, this year, more than 1 million U.S. employees will be able to make their enrollment experiences easier by using MetLife’s Upwise, a newly developed tool to help them choose and use their benefits.
Upwise simplifies benefits selection by making custom recommendations based on an employee’s individual needs and preferences. And Upwise is important because our research shows that more informed benefit selection decisions lead to a more engaged and productive workforce, a win for employees and employers.”
19. The Allstate Corporation (NYSE:ALL)
Number of Hedge Fund Investors In Q2 2024: 61
Sector: Financials
The Allstate Corporation (NYSE:ALL) is one of the biggest property and casualty insurance companies in America. As of H1 2024, nearly 89% of the firm’s revenue came from property and casualty insurance premiums. The Allstate Corporation (NYSE:ALL)’s size as the fourth biggest American home insurance company also heavily exposes the firm to catastrophe losses driven by climate change and hurricanes in the US. This has been the case in 2024 as well, with The Allstate Corporation (NYSE:ALL) taking a massive $630 million catastrophe hit from Hurricane Helene which also led to its shares losing 5.81% in mid-October. To shore up capital, the firm is also selling its employee benefits division, and its turnaround strategy for the auto insurance business through selective underwriting and expense reduction led to a combined ratio of 96 for the business in Q1. Further improvement coupled with overall expense reduction could lead to tailwinds for the stock.
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.”
18. Eversource Energy (NYSE:ES)
Number of Hedge Fund Investors In Q2 2024: 26
Sector: Utilities
Eversource Energy (NYSE:ES) is a large and diversified utility that distributes electricity and natural gas. Out of the firm’s $5.8 billion revenue in H1 2024, almost 51% came through residential customers. This means that Eversource Energy (NYSE:ES) is heavily dependent on regulators to ensure that it is able to secure beneficial return on equity (ROE) for its power generation projects. The firm is also currently divesting its renewable wind power generation businesses to raise cash and focus on power generation. These sales, along with another sale of Eversource Energy (NYSE:ES)’s Aquarion water business are crucial to one of the key drivers of the firm’s hypothesis. This is its funds from operations to debt ratio, and Eversource Energy (NYSE:ES) is targeting a FFO/debt ratio of 14% to 15% in 2025.
Eversource Energy (NYSE:ES)’s management shared key details about how it expects to manage this ratio during the Q2 2024 earnings call:
“I’ll now provide an update on some of the items shown on Slide 11 that will enhance our FFO to debt ratio from 2023 to 2025. First, the 2024 annual rate adjustment in Connecticut became effective July 1 of this year, recovering approximately $900 million of several costs, including public benefits related costs. The July 1st rate adjustment is recovering under collections from 2023 and has reset rates to a level matching recurred cost that we expect in 2024. Public benefit costs include the cost of energy supply contracts with the Millstone and Seabrook nuclear power plants and uncollectible hardship costs. Second, with the closing of our sale of Sunrise Wind to Ørsted, we received net proceeds of $152 million that will be used to pay down debt.
Third, the closing of our sale of Revolution and South Fork Wind to Global Infrastructure Partners, we anticipate receiving gross proceeds of approximately $1.1 billion, subject to adjustments for capital expenditures. These proceeds will also be used to pay down debt. As a reminder, there is no impact to our financing plan from these capital expenditure adjustments. In addition, the filings for distribution rate increases at PSNH and at EGMA will provide additional cash flow enhancement. And lastly, regarding our equity issuances, we have raised approximately $250 million of equity through our ATM program and issued approximately 819,000 treasury shares in the first half of this year. We continue to anticipate equity means of up to $1.3 billion over the next several years, as shown on Slide 12.”
17. Public Service Enterprise Group Incorporated (NYSE:PEG)
Number of Hedge Fund Investors In Q2 2024: 34
Sector: Utilities
Public Service Enterprise Group Incorporated (NYSE:PEG) is a regulated American utility headquartered in Newark, New Jersey. The fact that it’s a regulated utility means that the firm is dependent on regulators to secure lucrative return on equity (ROE) for its power generation projects. These also mean that if it is able to secure high ROE for its projects, then Public Service Enterprise Group Incorporated (NYSE:PEG) is insulated from power prices dropping during periods of lower demand. October was a key month for the firm on the regulatory front as it was able to secure its first price hike in six years from New Jersey regulators. Public Service Enterprise Group Incorporated (NYSE:PEG) also plans to grow its renewable energy portfolio using nuclear energy to power data centers and benefit from the booming AI demand.
Public Service Enterprise Group Incorporated (NYSE:PEG)’s management commented on its plans for the data center sector during the Q2 2024 earnings call:
“We also continue to pursue potential incremental investment opportunities for future regulated growth. Along those lines, PSE&G is experienced an increase in new business requests and feasibility studies from potential data center customers across our service area compared with 2023 activity, which combined with increased electric vehicle charging is expected to drive load growth and system investment needs in the future. Switching to regulated transmission solicitations, which are scheduled for this summer, PSE&G expects that the BPU will announce the winner or winners of the pre-built offshore wind infrastructure during the second half of 2024.
Last month, the BPU postponed its second state agreement approach process to procure transmission to support offshore wind generation, while it evaluates the impact of FERC and PGM activity on long-term transmission planning, cost allocation and interconnection queue reform. The BPU may reevaluate this timing and the need for a second SAA solicitation in six months, which would be this coming December. PJM opened the 2024 regional transmission Expansion Plan Window 1 solicitation earlier this month, which reflects their higher load growth forecast on the 2029 to 2032 plan horizon. That has been influenced by increased electrification expectations and data center load growth throughout PJM. We are evaluating the Window 1 solicitation for potential opportunities to bid this September.
Now crossing the Hudson for a moment, and as expected, the Long Island Power Authority opened a request for proposal process to select the manager to operate their electric grid. Our existing operating services agreement and power supply contract with LIPA runs through the end of 2025. We intend to submit proposals into their RFP process and LIPA is expected to make selections early next year. At PSEG Power, we are also continuing to explore opportunities for the potential sale of electricity from our nuclear facilities pursuant to long-term agreements to supply large power energy users such as data centers and hydrogen producers.”
16. NextEra Energy, Inc. (NYSE:NEE)
Number of Hedge Fund Investors In Q2 2024: 73
Sector: Utilities
NextEra Energy, Inc. (NYSE:NEE) is a diversified renewable energy company. With a portfolio capable of generating 33GW of electricity and relying on various sources such as nuclear and solar, the firm is one of the biggest renewable energy providers in America. This makes it unsurprising that NextEra Energy, Inc. (NYSE:NEE)’s shares are up 25.6% year to date as renewable energy stocks have seen considerable investor interest due to their ability to clean power gigawatt scale data centers required by the technology industry for artificial intelligence computing. NextEra Energy, Inc. (NYSE:NEE) also benefits from its ability to generate nuclear power since nuclear power’s ability to meet high baseload is key to running data centers. However, the optimism surrounding the firm’s ability to power artificial intelligence has been dampened by the need to raise capital to finance costly power generation projects. As an example, NextEra Energy, Inc. (NYSE:NEE)’s shares 4% in October when it announced another equity round to finance projects.
NextEra Energy, Inc. (NYSE:NEE)’s 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.”
15. Eastman Chemical Company (NYSE:EMN)
Number of Hedge Fund Investors In Q2 2024: 28
Sector: Materials
Eastman Chemical Company (NYSE:EMN) is one of the biggest chemical companies in the world. This enables it to have a diversified business model that caters to the needs of several industries such as aviation, pharmaceutical, construction, and agriculture. Yet, even though it has a diversified customer base, the industrial nature of its products naturally leaves Eastman Chemical Company (NYSE:EMN) exposed to the broader economy. Consequently, the fact that its shares are up a modest 13.9% year to date is unsurprising. Eastman Chemical Company (NYSE:EMN) does have some interesting long-term catalysts. One of these is the firm’s push towards recycled polyester which can help it capture demand from big-ticket firms like Pepsi. A tight global economic environment has forced Eastman Chemical Company (NYSE:EMN) to cut costs though with a $200 million cost reduction plan in play. The stock’s future depends on several factors such as economic conditions in Europe and China and the state of the ongoing de-stocking in the industry.
The inventory concerns were also on Eastman Chemical Company (NYSE:EMN)’s management’s mind during the Q2 2024 earnings call:
“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.”
14. International Flavors & Fragrances Inc. (NYSE:IFF)
Number of Hedge Fund Investors In Q2 2024: 46
Sector: Materials
International Flavors & Fragrances Inc. (NYSE:IFF) is a specialty chemicals company that caters to the needs of the perfume, pharmaceutical, food, and other industries. This provides the firm with some diversification, as while it can earn stable revenue from the pharma sector during economic tightness, the discretionary nature of the fragrance industry helps it pick up sales when the economy is robust. Looking ahead, International Flavors & Fragrances Inc. (NYSE:IFF)’s hypothesis depends on the pickup in the consumer goods industry and the firm is well equipped to cater to any demand recovery which has been muted lately due to inventory de-stocking. The two key tenets on which International Flavors & Fragrances Inc. (NYSE:IFF)’s hypothesis rests are volumes and pricing power.
The turbulent economy has created difficulties for International Flavors & Fragrances Inc. (NYSE:IFF) lately. Here’s what management had to say on this front during its Q2 2024 earnings call:
“As I did last quarter, I would like to give a brief update on our progress as we work across the organization to refresh our strategy and focus on a business-led operating model. IFF has had a challenging last three years. Constraints on our balance sheet led the Company to underinvest in our core businesses and focused on divestitures. The Company was not structured to effectively navigate the complex and fast moving environment, and we underperformed relative to our peers. We have now had several quarters of growth as we have taken decisive actions to get our businesses back on-track. Our strategy moving forward will be driven by four key pillars: our people, our customer focus, our position as an innovation powerhouse and our operational excellence.
We will engage and empower our people to deliver customer success while we drive profitable market share growth over time. We will also continue to develop sustainable new products and applications that are aligned with our customers’ needs now and in the future, all while being relentless in our commitment to safety, quality and the efficiency in our operations. We have already taken several steps toward resetting and refocusing our operating model, including the announced divestiture of Pharma Solutions, which is still on-track to close in the first half of 2025, and our pivot to an end-to-end business-led operating model that will promote greater accountability and better performance. We are also working hard to improve employee engagement and are seeing positive results.”
13. Newmont Corporation (NYSE:NEM)
Number of Hedge Fund Investors In Q2 2024: 61
Sector: Materials
Newmont Corporation (NYSE:NEM) is a global gold miner with operations in the Americas and Australia. It is one of the biggest gold mining firms in the world. As a result, Newmont Corporation (NYSE:NEM)’s hypothesis depends on the firm’s ability to grow and maintain gold output and simultaneously keep costs low. Any under-performance on either of these fronts translates into share price weakness as while lower costs are mitigated by margin erosion effects of lower volumes, high costs mean the firm can incur losses even if volumes are sizable. These factors were evident following Newmont Corporation (NYSE:NEM)’s third-quarter earnings, following which the shares dropped by a painful 14.70%. This was because the firm’s costs jumped by 12.9% to $1,611 per ounce and led to investor pessimism despite the fact that Newmont Corporation (NYSE:NEM) grew production by 29.2% to 1.67 million ounces and beat analyst estimates of 1.64 million ounces. The firm also has access to 30 billion pounds of copper reserves which could position it well to benefit from rising electrification.
Newmont Corporation (NYSE:NEM)’s management commented on the crucial topic of costs during the Q3 2024 earnings call:
“All in sustaining costs for the fourth quarter are expected to be approximately $14.75 an ounce, which represents an 8% reduction compared to the third quarter. This favorable decline is expected to be driven by higher gold production volumes and will be slightly offset by higher sustaining capital reinvestment, primarily anticipated at Nevada Gold Mines based on the run rate through the third quarter, and Cadia to remedy and expand the current tailings facilities as Natascha described.”
12. Ralph Lauren Corp (NYSE:RL)
Number of Hedge Fund Investors In Q2 2024: 36
Sector: Consumer Discretionary
Ralph Lauren Corp (NYSE:RL) is one of the biggest fashion and apparel companies in the world. It is known for its high-end fashion products which makes it one of the more interesting consumer discretionary stocks on our list. This is because while typical discretionary stocks generally see their product demand drop during inflation and tough economic conditions, firms like Ralph Lauren Corp (NYSE:RL) can take solace in the fact that their target customers are somewhat immune.to tough economic conditions. This has been evident in the share price as well since the stock is up 35.4% year to date. Key to this bullishness is Ralph Lauren Corp (NYSE:RL)’s digital division which added 1.7 million customers as of February and its China sales which recently grew by 40%. Looking forward, the firm’s performance depends on its US division sales during the holiday season and a potential recovery in the wholesale business.
Ralph Lauren Corp (NYSE:RL)’s management commented on its US wholesale division 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.”
11. Mohawk Industries, Inc. (NYSE:MHK)
Number of Hedge Fund Investors In Q2 2024: 40
Sector: Consumer Discretionary
Mohawk Industries, Inc. (NYSE:MHK) is a building products company that sells flooring, tiles, roofing, and other associated products. As a result, the firm tends to thrive when interest rates are low and consumers and builders are able to buy its products for their projects. This has manifested in Mohawk Industries, Inc. (NYSE:MHK)’s share price as the stock is up 27.6% year to date. Part of the gains are attributable to tight management cost control, with the firm’s earnings per share growing by 9% during the second quarter and beating analyst estimates despite the fact that Mohawk Industries, Inc. (NYSE:MHK)’s revenue dropped by 5.1% annually to $2.8 billion. However, cost control can only take a real estate-exposed firm so far in today’s environment. This was clear after the firm’s Q3 results following which the stock lost 11.6%. During the quarter, Mohawk Industries, Inc. (NYSE:MHK)’s $2.7 billion revenue and $2.90 in EPS were in line with analyst estimates. Its midpoint $1.82 EPS guidance for Q4 missed analyst estimates of $2.24 by a wide margin, and consequently, investors priced out some of the growth from Mohawk Industries, Inc. (NYSE:MHK)’s shares.
Ariel Investments mentioned Mohawk Industries, Inc. (NYSE:MHK) in its Q3 2024 investor letter. Here is what the fund said:
“Several stocks in the portfolio had strong returns in the quarter. Manufacturer and distributor of floorcovering products, Mohawk Industries, Inc. (NYSE:MHK) advanced following solid earnings results and a subsequent increase in near-term guidance. Although sales volumes remain low and pricing headwinds continue, improved productivity and lower material costs drove margin expansion. Management also repurchased shares signaling increased confidence that the trough in earnings may be behind the company. In our view, MHK’s healthy balance sheet and progress managing through economic cycles position the company to benefit from long-term growth in residential remodeling, new home construction and commercial projects.”
10. Hilton Worldwide Holdings Inc. (NYSE:HLT)
Number of Hedge Fund Investors In Q2 2024: 64
Sector: Consumer Discretionary
Hilton Worldwide Holdings Inc. (NYSE:HLT) is one of the biggest hospitality companies in the world. It has a presence all over the world through properties under its namesake, Waldorf Astoria, and other brands. As a result, the firm’s narrative depends on the key metric of revenue per available room and the performance of the global economy due to its global presence. Hilton Worldwide Holdings Inc. (NYSE:HLT) depends to a large extent on its franchise revenue, with 23% of its H1 2024 revenue coming from franchises. Another chunk comes from its managed properties, and the stock’s performance in 2024 has mirrored economic sentiment. A weakening labor environment and souring investor sentiment led to the shares tumbling by 7.7% in late July and early August. Since the Fed’s interest rate cut though the shares have gained 7% and its future outlook depends on revenue per room, global travel patterns, and global economic performance.
Hilton Worldwide Holdings Inc. (NYSE:HLT)’s management shared key details about its pipeline during the Q3 2024 earnings call:
“We welcome nearly 400 luxury properties through our exclusive agreement with Small Luxury Hotels of the World. These properties, spanning 70 different countries, provide Honors members even more opportunities to book unique luxury experiences and sought-after destinations across the globe. Including SLH and our existing luxury properties, we now have one of the largest luxury hotel portfolios in the industry. Conversions accounted for 60% of openings in the quarter, driven by the addition of SLH properties and continued momentum from Spark. We opened more than 20 Spark hotels in the quarter and now have over 6,000 Spark rooms in supply just a year after the brand opened its first property. Spark now has opened hotels in the US and the UK and Canada, and we recently announced plans to open hotels in Germany and Austria before the end of the year.
The brand’s pipeline is three times larger than its existing supply, and we expect continued launches in international markets to further boost Spark’s trajectory, positioning us well for future growth in the premium economy space. In the quarter, we signed 28,000 rooms, expanding our pipeline to more than 492,000 rooms, which is up 8% year-over-year, excluding partnerships, our pipeline also increased from the second quarter. We signed three luxury deals in Greece, Japan and the UAE and 35 lifestyle properties, including a record 15 Curios. Conversions accounted for more than 30% of signings in the quarter, driven by the strength of Spark and continued momentum across Curio, Tapestry and DoubleTree. Construction starts remained strong, up 21%, excluding acquisitions and partnerships.
We remain on track to exceed prior levels of starts by year-end with meaningful growth across both the US and international markets. Approximately half of our pipeline is under construction, and we continue to have more rooms under construction than any other hotel company, accounting for more 20% of industry share and nearly four times our existing share of supply. As a result of our strong pipeline and under construction activity, we continue to expect net unit growth of 7% to 7.5% for the full year and 6% to 7% for 2025. We continue to be recognized for our culture and award-winning brands. During the quarter, we were named the top hospitality workplace in Latin America and Asia by Great Place to Work, adding to the more than 560 Great Place to Work Awards and nearly 60 number one wins around the world since 2016.”
9. Cardinal Health, Inc. (NYSE:CAH)
Number of Hedge Fund Investors In Q2 2024: 39
Sector: Healthcare
Cardinal Health, Inc. (NYSE:CAH) is a diversified healthcare products company that sells a variety of products and equipment such as medicines and surgical supplies. This provides it with the key advantage of having an insulated business model that is less susceptible to economic downturns. At the same time, its presence in the pharmaceutical and tertiary industries also means that Cardinal Health, Inc. (NYSE:CAH) is dependent on its partnerships with benefits providers. This was evident in April when the shares dropped by 5% after word surfaced that the firm would lose out on OptumRx pharmacy contracts. However, despite the loss of a business that at one point accounted for 13% of its revenue, Cardinal Health, Inc. (NYSE:CAH)’s shares are up 13.17% year to date. This is partly due to the firm’s push in the specialty market, which is known for high demand and pricey drugs to treat cancer and other ailments. Cardinal Health, Inc. (NYSE:CAH) bought community cancer center Oncology Network for $1.12 billion in cash in September to grow its specialty market presence. Its latest quarterly revenue of $52.3 billion also beat analyst estimates of $50.9 billion to send the stock soaring by 7%.
Cardinal Health, Inc. (NYSE:CAH)’s management shared its take on the oncology-driven specialty business during the Q4 2024 earnings call:
“As expected, we are leveraging specialty networks’ demonstrated capabilities in neurology, the largest area of its fully integrated model, to enhance our offering in oncology. The fully integrated specialty networks market offering is directly aligned with our strategy for Navista, our oncology practice alliance providing advanced technology and services.
Over the course of the last year, we’ve built a world-class Navista team consisting of industry experts, defined our offerings and go-to-market strategy, and completed our foundational technology build. The Navista team is engaging with an active pipeline of customers across the oncology marketplace, demonstrating to community oncologists how Navista can help them remain independent for good. Upstream with manufacturers, our leading specialty 3PL has continued its track record of growing faster than market with nearly 20% growth during the year. We’re leveraging these services as part of our comprehensive offering that further facilitates the commercialization and delivery of critical cell and gene therapies to providers and patients. Our new advanced therapy solutions innovation center features a specialized deep frozen storage suite to handle the logistical challenges associated with cell and gene therapies.”
8. Illumina, Inc. (NASDAQ:ILMN)
Number of Hedge Fund Investors In Q2 2024: 56
Sector: Healthcare
Illumina, Inc. (NASDAQ:ILMN) is a California-based back-end medical products and services provider. A specialty firm, it caters to the needs of the genetic testing and robotics sections of the medical industry. Consequently, Illumina, Inc. (NASDAQ:ILMN) is a high-growth firm that depends on loose capital conditions that drive higher spending in gene testing and robotics. This makes it unsurprising that the shares are up by a modest 11.9% year to date. Yet, Illumina, Inc. (NASDAQ:ILMN)’s stock might have pent-up potential due to the fact that it is one of the biggest sequencing product providers in the medical industry. An economic recovery could drive up spending in its target industries and lead to share price tailwinds. Potential tailwinds include continuing weakness in the Chinese market.
Artisan Partners mentioned Illumina, Inc. (NASDAQ:ILMN) in its Q3 2024 investor letter. Here is what the fund said:
“Notable adds in the quarter included Samsara, Illumina, Inc. (NASDAQ:ILMN) and Onto Innovation. Illumina is a leading provider of next-generation sequencing instruments for genetic testing. As costs have fallen, genome sequencing has become more mainstream, expanding within academic research and beyond into high-value clinical diagnostic testing applications. The company has gone through a difficult few years after an unwise acquisition of Grail (a company that develops blood tests designed to detect cancers), a difficult transition to a new sequencing system and significant margin contraction. However, new management has focused on controlling costs, has spun out Grail and, in our view, is putting the company back on a path of sustainable growth. With a stock price that we do not believe reflects Illumina’s value as a unique life science tools franchise, we continue to build our GardenSM position.”
7. HCA Healthcare, Inc. (NYSE:HCA)
Number of Hedge Fund Investors In Q2 2024: 69
Sector: Healthcare
HCA Healthcare, Inc. (NYSE:HCA) is one of the biggest hospital and healthcare center operators in the US. The firm owns and operates inpatient and outpatient healthcare facilities that cover a wide range of medical specialties. Consequently, owing to the pricey and complex nature of the US healthcare industry, HCA Healthcare, Inc. (NYSE:HCA) depends to a large extent on its deals with public and private healthcare coverage providers. It also creates a climate-related angle to the hypothesis, since hurricanes disrupt its operations, increase healthcare costs, and reduce facility traffic. This was also the case in October when HCA Healthcare, Inc. (NYSE:HCA)’s shares dropped by 10.6% after it took a $50 million revenue hit from Hurricane Helene and missed analyst EPS estimates of $4.95 for Q3 by posting $4.88. However, the firm benefits from its vast network which provides it with key margin benefits and primes it for growing healthcare spending in America.
Baron Funds mentioned HCA Healthcare, Inc. (NYSE:HCA) in its Q2 2024 investor letter. Here is what the fund said:
“On the health care provider side, volumes remain healthy and labor costs have moderated. We continue to like HCA Healthcare, Inc. (NYSE:HCA), the best-in-class hospital operator with an attractive set of increasingly diversified assets in strong urban markets, where it is typically the #1 or #2 provider. Its strong operating cash flow and under-levered balance sheet provide flexibility to make growth investments and return capital to shareholders.”
6. Arista Networks, Inc. (NYSE:ANET)
Number of Hedge Fund Investors In Q2 2024: 65
Sector: Information Technology
Arista Networks, Inc. (NYSE:ANET) is a technology company that focuses on cloud computing hardware and software. The firm makes and sells Ethernet products, and it also provides key networking software that is used in large-scale computing systems. These provide Arista Networks, Inc. (NYSE:ANET) with exposure to the artificial intelligence industry particularly since intra-data center connectivity depends to a large extent on its products. At the same time, it also opens Arista Networks, Inc. (NYSE:ANET) up to competition from NVIDIA which sells InfiniBand products as Ethernet competitors. However, the firm benefits from being a pure-play connectivity hardware and software provider. This enables it to deeply develop key capabilities, with the software business also offering margin-heavy recurring revenue. An example of how Arista Networks, Inc. (NYSE:ANET) has benefited from this is through its deal with Facebook parent Meta to help develop a 100,000 AI GPU cluster.
Madison Funds mentioned Arista Networks, Inc. (NYSE:ANET) in its Q2 2024 investor letter. Here is what the fund said:
“We trimmed our positions in Arista Networks, Inc. (NYSE:ANET) and Carlisle Companies. Both of these companies have witnessed strong multi-year growth in their stock prices, which have resulted in elevated valuations. While we remain confident in the long-term prospects of both of these businesses, we trimmed our holdings to more appropriate position sizes given the risk/reward offered.”
5. Oracle Corporation (NYSE:ORCL)
Number of Hedge Fund Investors In Q2 2024: 93
Sector: Information Technology
Oracle Corporation (NYSE:ORCL) is one of the biggest enterprise resource planning (ERP) firms in the world. Its experience in providing businesses with their resource management needs has enabled the firm to become one of the key players in the artificial intelligence industry. While Oracle Corporation (NYSE:ORCL) does not develop AI software or foundational models, it has access to the oil of the AI industry, a.k.a., NVIDIA’s GPUs. Through its Oracle Cloud Infrastructure business, the firm aims to offer as much as 131,072 of NVIDIA’s latest Blackwell GPUs to AI companies in 2025. Given that Blackwell is in short supply, this provides Oracle Corporation (NYSE:ORCL) with a wide moat in the AI infrastructure industry. Additionally, it also enjoys a key moat in the ERP industry courtesy of its 18.4% market share which makes it the second biggest player in the market. Firms are typically hesitant to switch ERP vendors due to costs and disruption risks, which means that Oracle Corporation (NYSE:ORCL) stands to enjoy stable recurring revenue for long time periods.
Janus Henderson mentioned Oracle Corporation (NYSE:ORCL) in its Q2 2024 investor letter. Here is what the fund said:
“Enterprise software company Oracle Corporation (NYSE:ORCL) was a top contributor to relative performance. The company reported revenue and bottom line metrics that were in line to slightly below consensus; however, it also reported record bookings for new business. This accelerating revenue growth outlook is being driven by AI cloud infrastructure deals and boosted sentiment in the stock.”
4. Broadcom Inc. (NASDAQ:AVGO)
Number of Hedge Fund Investors In Q2 2024: 130
Sector: Information Technology
Broadcom Inc. (NASDAQ:AVGO) is one of the biggest technology companies in the world. The firm operates in the hardware and software industries. Its key strengths lie on the former front, with Broadcom Inc. (NASDAQ:AVGO) responsible for providing networking and custom chips for a wide variety of use cases. These provide the firm with large customers like Apple and have enabled it to establish a foothold in the AI industry. Broadcom Inc. (NASDAQ:AVGO) benefits from AI through its custom chips, and word on the street is that the firm has partnered up with OpenAI to develop a custom chip. Yet, reliance on customers like Apple is a double-edged sword as it also exposes Broadcom Inc. (NASDAQ:AVGO) to revenue losses in case its customers decide to develop custom chips. On the software front, the firm’s VMWare acquisition has enabled it to sizably grow its revenue and could lead to further tailwinds in the future.
Baron Funds mentioned Broadcom Inc. (NASDAQ:AVGO) in its Q2 2024 investor letter. Here is what the firm said:
“Broadcom Inc. is a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions. The stock rose during the quarter as it reported strong earnings on the back of its two key growth drivers, AI semiconductors and its acquired VMware software business. The company once again increased its outlook for AI-related revenue, now expecting $11 billion or more this year (versus prior guidance for $10 billion), on the back of strength in both hyperscale custom compute and networking chips, where Broadcom maintains dominating share. In networking, Broadcom’s solutions are critical to enabling AI training factories to scale towards 100,000 chip clusters in the near term and 1 million chip clusters over the coming years. In AI custom compute, Broadcom designs custom accelerators for large consumer- internet AI companies (such as Google and Meta), who are building increasingly large AI clusters to drive improvements in user engagement and targeted advertising on their consumer media platforms. VMware remains on track to continue rapid sequential growth while simultaneously reducing operating expenses, driving faster-than-expected margin expansion and accretion, as management has simplified the product offering and is converting customers from a license model to subscriptions. We believe VMware will grow beyond the $4 billion near-term quarterly target, well above current analyst expectations. These two factors combined have caused a re-rating to the growth profile for the overall company. To quote CEO Hock Tan, “there is only one Broadcom. Period.”
3. T-Mobile US, Inc. (NASDAQ:TMUS)
Number of Hedge Fund Investors In Q2 2024: 64
Sector: Communication Services
T-Mobile US, Inc. (NASDAQ:TMUS) is one of the three mega telecommunications carriers in the US. Consequently, its narrative depends on its average revenue per user, subscriber growth, and growth in broadband users. T-Mobile US, Inc. (NASDAQ:TMUS) benefits from robust financial performance and has one of the highest free cash flow margins in the industry. Additionally, the firm has also kept its focus on the future and partnered up with SpaceX to offer direct-to-cell coverage via the latter’s Starlink satellites. This service was offered to users for free during Hurricane Helene, and T-Mobile US, Inc. (NASDAQ:TMUS) could potentially expand its partnership with SpaceX to include broadband internet as well. The firm is already establishing a comfortable lead for itself in the 5G market too. T-Mobile US, Inc. (NASDAQ:TMUS)’s third quarter saw it add 865,000 postpaid customers as its premium 5G plans resonated well with customers.
T-Mobile US, Inc. (NASDAQ:TMUS)’s management shared key details for its postpaid users during the Q3 2024 earnings call:
“So let me provide a quick update on our expectations for 2024. Starting with customers, we are once again raising total postpaid customer net additions and now expect between $5.6 million and $5.8 million, up $150,000 at the midpoint relative to our prior guide. We now expect the postpaid phone customer net additions component of that total to be approximately 3 million for the full year. We expect our full year postpaid ARPA to be up around 3% year-over-year with industry-leading service revenue growth continuing to accelerate at a higher rate in 2024 than we delivered in 2023.”
2. The Walt Disney Company (NYSE:DIS)
Number of Hedge Fund Investors In Q2 2024: 92
Sector: Communication Services
The Walt Disney Company (NYSE:DIS) is one of the biggest entertainment companies in the world. The firm operates in the film and television industries through a variety of lucrative platforms, and its theme parks are a globally recognized brand name. Consequently, the diversified business model along with a rapidly evolving media industry means that The Walt Disney Company (NYSE:DIS)’s hypothesis depends on several factors. For starters, its theme park business is dependent on the broader economy and travel spending especially as the global industry continues to recover from the coronavirus pandemic. Secondly, The Walt Disney Company (NYSE:DIS) also has to focus aggressively on its direct-to-consumer and streaming initiatives to ensure it captures a fast-growing market held by firms like Netflix. Market share growth in streaming and profitability for DTC can lead to tailwinds for the stock, and The Walt Disney Company (NYSE:DIS) sports businesses such as ESPN also provide it with a sizable base that it can leverage to its advantage.
Mar Vista Investment Partners mentioned The Walt Disney Company (NYSE:DIS) in its Q2 2024 investor letter. Here is what the fund said:
“The Walt Disney Company’s (NYSE:DIS) shares declined after its earnings release, even though the company exceeded recently upgraded financial forecasts. While Disney+ and Hulu reached a milestone by turning their first quarterly profit, the company cautioned about theme park attendance returning to pre-pandemic norms. This signals a deceleration following a period of exceptional growth, impacting the stock as theme parks and experiences account for roughly 60% of Disney’s earnings. Despite broader consumer worries, Disney’s stock is still trading with a significant discount to fair value. We expect the gap between Disney’s market price and its intrinsic value to shrink as its streaming division evolves and increases profitability over time.”
1. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Investors In Q2 2024: 219
Sector: Communication Services
Meta Platforms, Inc. (NASDAQ:META) is the largest social media and communications services company in the world. Its Facebook social network boasts a whopping 3.2 billion users. This user base is key to Meta Platforms, Inc. (NASDAQ:META)’s hypothesis, as it makes it indispensable to advertisers for running their campaigns. The firm’s social media dominance has also enabled it to establish sizable financial resources as is evident by its trailing twelve-month revenue of $156 billion and cash and equivalents of $43.9 billion. In turn, Meta Platforms, Inc. (NASDAQ:META) has used its sizable resources to develop a foothold in the AI industry via its Llama foundational AI model. Through Llama, the firm offers AI marketing services to advertisers and image editing and associated services to consumers. Consequently, the billions that the firm has invested in AI are now baked into its hypothesis, with the share price dependent on Meta Platforms, Inc. (NASDAQ:META)’s ability to generate AI profits to convince investors that the spending was worth it. This was clear after the firm’s Q3 earnings which saw the stock drop by 3% after Meta Platforms, Inc. (NASDAQ:META) increased its low-end 2024 CapEx guideline by $1 billion to $38 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.”
META is a top stock with improving technical indicators according to UBS. While we acknowledge the potential of META as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than META but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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