Hedge funds were battered by losses and investor redemptions during the worst of the financial crisis, but now that the industry has regained some of its swagger, I thought it might be worth asking: Which stocks has the "smart money" been buying?

The following table shows the top five stocks in the S&P 500, ranked by the number of net new hedge fund positions:

Stock

Number of Net New Positions
by HF Managers*

Increase in Percentage of Shares
Owned by HF Managers**

Mead Johnson (NYSE: MJN)

40

16.3 percentage points

Wells Fargo

35

2.4

Pfizer (NYSE: PFE)

34

1.0

Citigroup (NYSE: C)

27

2.4

Amazon.com (Nasdaq: AMZN)

25

0.7

Source: Capital IQ, a division of Standard & Poor's.
*New hedge fund positions minus closed out positions in the last quarter.
**Latest available ownership data versus next-last-quarter data.

In summary: two defensive companies (Mead Johnson, Pfizer), two banking giants (Wells Fargo, Citi), and a growth darling (Amazon). The stock I find most interesting on this list is Mead Johnson, an infant formula manufacturer that was carved out of Bristol-Myers Squibb last February.

Quality sells
At the time, I flagged the company to some of my Motley Fool colleagues, describing it as a "Buffett-type business." What a shame I wasn't listening harder to myself: The stock has been on a tear, gaining nearly 80% since it began trading on Feb. 11, 2009. While it no longer appears cheap at almost 20 times this year's estimated earnings-per-share, Mead Johnson is a high-quality business with attractive growth prospects -- nice characteristics under any circumstances, but particularly in the current environment.

A Feb. 8 Hedge Fund Monitor report produced by Bank of America Merrill Lynch, a unit of Bank of America (NYSE: BAC), suggests that "long-short equity" hedge funds are increasingly tilting their long positions toward high-quality and growth stocks. (I've been flogging the "high quality" theme since August).

How robust the recovery?
More broadly, of the top 25 stocks in terms of net new positions by hedge funds, I was surprised to find the best-represented sector is consumer discretionary, which suggests that hedge fund managers believe the recovery is taking hold and consumer spending will accelerate. However, the next best-represented sector was health care (with stocks including IMS Health (NYSE: RX) and WellPoint (NYSE: WLP)) -- "defensive" stocks make sense as the U.S. consumer continues to deleverage and the fear linked to health-care reform created a good buying opportunity.

Tracking hedge fund investments can produce some stock ideas, but if you want to earn serious profits, you need to buy stocks before Wall Street catches on.