Hedge funds have just released their portfolio trades for the second quarter. And now is the time to evaluate these trades for valuable investing insights. Here we focus on one particular aspect of hedge fund activity- new stock additions.
That’s using an August 19 report from RBC Capital which analyzes the 2Q19 13f forms of 363 major hedge funds with significant stakes in US equities (single stocks). The firm used this data to pinpoint the top stocks where hedge fund ownership rose the most during 2Q19, in terms of the net number of funds that added new positions.
Three names fall in Health Care (including the #1 name- Allergan (AGN)). Another three names fall in Industrials, notes the firm. But there is one key stock worth bearing in mind: “Note that UBER (UBER) does not qualify for this screen as it does not fall in the S&P 500 and it began trading mid way through the 2nd quarter. It was owned by 51 hedge funds at the end of 2Q19” points out the firm.
With that being said, let’s take a closer look at five top new stocks hedge funds are making a bet on right now:
1. Align Technology (ALGN)
Align Technology is leading an orthodontics revolution. The company invented the Invisalign- a clear teeth aligner system- that can replace traditional braces. In Q2, 14 new funds bought Align shares- bringing the total value of ALGN shares owned by hedge funds to $1,805 million.
Unfortunately however the stock has declined in both Q2 and Q3. Despite strong Q2 earnings results, the company’s guidance left investors disappointed. “Given the uncertainty in China,” CEO Joe Hogan commented, “our outlook for the third quarter reflects a more cautious view for growth in the Asia Pacific region.”
Don’t be disheartened, says Piper Jaffray’s Matthew O’Brien. This five-star analyst has just reiterated his ALGN buy rating with a $240 price target (37% upside potential). Align “has much better products that will win in the marketplace” he tells investors. O’Brien believes that an accelerated stock repurchase plan of $200 million demonstrates confidence in Align’s outlook.
Overall, ALGN shows a Moderate Buy analyst consensus, with an average price target of $259. Interestingly if we look at only the best-performing analysts, this consensus shifts to Strong Buy.
2. Qualcomm (QCOM)
Chip titan Qualcomm is an intriguing hedge fund pick. In the second quarter, 20 more funds owned QCOM stock vs the first quarter. As a result, 15% of the funds covered in RBC Capital’s study now own Qualcomm. Their total holding works out at $1,682 million.
Despite numerous problems- most obviously the May 21 antitrust ruling – some analysts do see a bright future ahead. That’s thanks to the company’s prime 5G position. “We believe Qualcomm’s bull case is unchanged, with global 5G roll outs expected to increase both royalty income and demand for semiconductors beginning in 2020,” Merrill Lynch’s Tal Liani said recently.
“Press reports suggest that all of Apple’s 2020 iPhones will contain Qualcomm’s 5G chipset, which could drive a 5G cycle across the entire industry.” The analyst has just reiterated his QCOM buy rating and $100 price target (36% upside potential).
No doubt hedge funds are also relieved to hear that Qualcomm has just won a critical partial stay from The Ninth Circuit Court of Appeals. The company won’t have to grant patent licenses to rivals and can still require patent licenses for customers to buy chips while its appeal is ongoing.
According to Qualcomm general counsel Don Rosenberg, the company still believes “the district court decision will be overturned once the merits of our appeal have been considered.” In total, QCOM scores a Moderate Buy Street consensus with a $78 average price target.
3. Hologic (HOLX)
Medical tech stock Hologic focuses primarily on women’s health and beauty; it sells medical devices for surgery and medical imaging. During Q2, 14 funds initiated positions in HOLX. RBC Capital reveals that funds now own a total of $748 million in Hologic stock.
Of course, Hologic has a history when it comes to hedge funds. Back in 2013, hedge fund activist Carl Icahn swooped in with a 12.63% stake. Three years later he cashed in on what proved to be a successful intervention. “Yesterday our designees resigned from the [Hologic] board because the situation no longer calls for activism,” Icahn wrote on Twitter at the time. “Hologic is the quintessential example of activism at its best. We commend [Hologic chief executive] Steve MacMillan for a job well done.”
Looking ahead, analysts are divided over HOLX’s outlook. Five analysts currently rate the stock a buy, while four analysts are staying on the sidelines. “Hologic is gradually executing over the course of this year as its breast health and molecular diagnostics businesses pace its growth, but are offset by slower growth or declining segments” states Canaccord Genuity’s Mark Massaro.
This Top 50 analyst reiterated his hold rating on Hologic on August 1, but ramped up the price target from $49 to $52 (8% upside potential). “Near mid-single-digit growth and effective capital allocation (buybacks and tuck-in deals) are warming us up to the stock as HOLX delivered a 2% top-line beat, 2 cent bottom-line beat, and raised its FY top- and bottom-line guide” he explained.
4. United Technologies Corp (UTX)
Like the previous two stocks, United Technologies Corp saw the addition of 14 new funds in Q2. This aerospace and defense stock now features in 16% of the portfolios scanned by RBC Capital. And the total hedge fund holding is valued at $4,552 million.
Encouragingly, analysts are positive on UTX right now. The stock boasts a ‘Strong Buy’ consensus, and a price target that indicates 23% upside from current levels. Indeed, both Vertical Research and Seaport Global upgraded United Technologies from Hold to Buy in the last couple of months.
The analysts made their calls after the news of a proposed $120 billion merger between UTX and Raytheon (RTN) sent shares plummeting. The deal, which is set to close in the first half of the year, is currently undergoing an investigated by the U.S. Department of Justice’s antitrust division. According to Vertical Research analyst Jeffrey Sprague the stock’s weakness created an attractive buying opportunity.
More recently, five-star Cowen & Co analyst Cai Rumohr reiterated his UTX buy rating and $150 price target. Turning the cash flow corner, enthused Rumohr following Q2 earnings. “Q2’s EPS/cash flow beat suggests cash consuming build in new aerospace programs is starting to reverse with a likely multi-year ramp in standalone CFPS [cash flow per share]. And the proposed RTN merger would accelerate cash deployment potential” summed up the analyst.
5. Roper Technologies (ROP)
Roper Technologies is a diversified industrial company that produces engineered products for global niche markets. That includes everything from creative software technologies for visual effects and 3D content, to safety valves and radiotherapy solutions. Thirteen hedge funds started new positions in Roper during Q2, says RBC Capital.
Indeed, the firm’s own Deane Dray shares this bullish outlook on Roper stock. He recently reiterated his buy rating while bumping up the price target from $391 to $393 (13% upside potential). “Outperform-rated Roper’s modest 2Q19 beat featured its typical high quality of earnings” Dray wrote post-earnings.
However, the analyst added that there was a pang of disappointment with the disclosure that expected 2H19 slowing in short- cycle industrial businesses (8% of revenues) could pose a -10c headwind. Ultimately, though, Roper remains “indisputably one of the highest-quality names within the Multi-Industry sector.” It leads the pack in EBIT margin and free cash flow conversion thanks to its portfolio of low- capital-intensity and profitable SaaS and network businesses, he tells investors.
Currently five analysts rate ROP a buy, with only 1 analyst calling the stock a hold- giving it a ‘Strong Buy’ consensus. Meanwhile the average analyst price target stands at $399 suggesting shares can climb 15% in the coming months.