Hedge fund managers love Amazon, Facebook, Alphabet, and Microsoft
According to Jefferies, hedge funds increased their exposure to growth stocks aggressively in July, resulting in a 12.8 percent overweight, the largest overweight to the group since April 2020. Meanwhile, the industry has reduced its exposure to cyclicals to underweight after favoring the group since July of last year, according to the Wall Street firm.
In a note, Jefferies equity strategist Steven DeSanctis said, “Hedge Funds lost interest in Financials in particular, while gaining interest in Health Care, Info Tech, and Communications Services.” “In July, performance moved in the direction of where Hedge Funds were positioned.”
Jefferies examined 13F filings for long-only portfolios as well as the most popular names held by hedge funds for their Uber Crowded Portfolio. This month, the basket of 20 stocks has gained 5.2 percent, outperforming the SP 500′s return of only 2.9 percent.
Alphabet, the parent company of Google, received a boost this week after reporting quarterly results that showed a 69 percent increase in advertising revenue. This week, Facebook beat earnings expectations, but warned of a significant slowdown in growth ahead.
Investors were also pleased with Microsoft’s strong earnings report earlier this week. The Big Tech firm also provided an upbeat revenue forecast.
Nike, Activision Blizzard, and Lam Research were added to the basket this month, according to Jefferies, while Morgan Stanley, Discovery, and LPL Financial Holdings were removed.
Undervalued car stocks
Freddie Lait, managing partner at Latitude Investment Management, believes that large U.S. auto parts firms will benefit from the fact that people are wary of purchasing a new car with an internal combustion engine in the face of the trend toward electric vehicles.
The increase in used car prices, he said, signaled this trend, noting a 40-50 percent increase in some models.
“Some people [are] making huge profits from selling these used cars,” Lait said last week.
For these reasons, Lait stated that his funds’ only exposure to the auto sector was through auto parts retailers AutoZone and Advance Auto Parts in the United States.
Lait claims that since he began investing in those stocks in 2009, they have generated compound annual returns of nearly 20%.
He also stated that the companies made “very efficient use of buybacks within their business models,” with all free cashflow going toward stock repurchases. Repurchasing shares can help a company’s share price rise by reducing the number of outstanding shares on the stock exchange.
According to Lait, O’Reilly Auto Parts, Advance Auto Parts, and AutoZone accounted for 50% of the US market and were poised to gain even more as smaller “mom and pop” businesses struggled in the aftermath of the coronavirus pandemic.
“I believe that the opportunity for those larger chains to continue to grow into that white space that will be created actually adds a further benefit to their story, at the expense of smaller businesses, which is genuinely tragic, but I believe that is happening around the world,” Lait said.
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He described them as “very, very high return-on-capital businesses,” but added that because they service internal combustion engines, “no one is interested because everyone just wants to invest in the future, which is absolutely fine, but we believe these guys are the future.”
Lait stated that they would continue to invest in engine monitoring systems and supporting garages to service both EVs and internal combustion engine vehicles, “while returning a massive amount of cash to shareholders.”
“So they’re very underdiscussed, they’re a little under the radar, but I think that’s where we prefer to find our ideas in general,” he explained.
Singapore’s largest lender names Country Garden, China Resources Land, Longfor, Evergrande best stocks to buy now
Evergrande, one of China’s largest property developers in terms of sales, has been plagued by debt concerns for months as authorities try to cool the real estate market with new restrictions.
Evergrande shares have taken a beating as a result of the uncertainty. Evergrande’s Hong Kong stock had fallen more than 60% year to date as of Thursday’s close. The most recent drop occurred after the company announced that it would cancel a proposed special dividend. Evergrande was also downgraded by major credit rating agencies earlier this week, as concerns about Asia’s junk bond sector grew.
The most likely scenario
Nonetheless, DBS has set a 12-month price target of 22.94 Hong Kong dollars per share for Evergrande, representing a nearly 300 percent increase from the stock’s closing price on Thursday.
“We believe Evergrande should be able to fully service its outstanding debts through asset sales, raise funds through the spin-off of various of its businesses, and sell existing stakes in their subsidiaries. However, this is based on the assumption that Evergrande has enough time to carry out the aforementioned processes,” DBS Group Research analysts wrote in a Monday report.
According to the analysts, in this scenario, things would likely remain “largely status quo and end in a more orderly and controlled manner.”
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Larger property developers with stronger balance sheets are expected to benefit as they “continue to extend their advantages from their financial strength” and differentiate themselves from the competition, according to the analysts.
Under this scenario, DBS’ stock picks were:
Country Garden: 12.45 Hong Kong dollars per share is the target price (56.21 percent upside from its Thursday close)
China Resources Land: 49.60 Hong Kong dollars per share is the target price (77.78 percent upside from its Thursday close)
Longfor: 57.65 Hong Kong dollars per share is the target price (about 47.07 percent upside from its Thursday close).
Evergrande would not have enough time to resolve its situation in DBS’ second scenario, and thus would fail to meet its debt obligations.
“This will almost certainly cause a short-term shock to the market, affecting the overall supply chain of the property development sector and thus meaningfully affecting other developers,” the analysts wrote.
They went on to say that the Chinese central government may have to relax restrictive policies and initiate a round of loosening measures to soften the blow. This could potentially postpone Beijing’s goal of risk management and property price stabilization.
In this scenario, DBS advised investors to stick with names like Sunac and Zhongliang, which have seen their share and bond prices impacted by recent Evergrande developments.
DBS’s 12-month price targets for the two are as follows:
Sunac’s share price is 47.50 Hong Kong dollars (representing 125.65 percent upside from its Thursday close)
5.93 Hong Kong dollars per share for Zhongliang (representing about 36 percent upside from its Thursday close)