Hedge-fund managers are armed with enormous amounts of assets and data, so when they move, Mr. Market sits up and takes notice: With such large stakes involved, their buys and sells are not made lightly. And this may tempt retail investors to try and follow those giants' leads.
Trouble is, trying to replicate their strategies in a small portfolio will at best require some complex tactics, and at worst expose you to far too much risk. Even using their filings simply to point you toward good investments is chancy. The long periods between when they buy and sell and when they're required to show the public their moves can leave a retail investor chasing the ghost of profits past.
But even so, sometimes it is possible to find, among the popular hedge fund holdings, likely winners that it's not too late to buy. We asked a handful of your fellow investors here at The Motley Fool to pick some stocks they thought fit that bill. Read on to see why they chose Interactive Brokers (NASDAQ:IBKR), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon.com (NASDAQ:AMZN).
Picking a winner from the ashes
Jordan Wathen (Interactive Brokers): Interactive Brokers has been described as a "hedge fund hotel," as a laundry list of hedge funds own most shares of the company that its founder and key insiders don't. The thesis for Interactive Brokers is simple: Since price and execution (Interactive Brokers' strong suits) are the most important differentiating factors among discount brokers, the company should slowly skim the most price-sensitive and valuable customers from its competitors.
Aside from price, Interactive Brokers is benefiting from a changing regulatory and competitive landscape. Next year, a regulation known as the Markets in Financial Instruments Directive (MiFID) could completely change the brokerage business as we know it today.
Under MiFID, banks will no longer be able to offer "free" research as a perk for clients who use their services to place trades. Instead, many plan to sell research at a fixed price -- which could run into tens of thousands of dollars per year, per client. So smaller managers who previously enjoyed that access to research as a perk of sending their trading volume to a prime broker may instead opt to move some or all of their accounts to discount operators like Interactive Brokers.
The company's growth is astounding, and it has recently accelerated. In August, accounts were 22.9% higher year over year, the largest percentage increase observed in data going back all the way to the beginning of 2009.
While it seems as though many will lose out due to deep discounting and increased competition, Interactive Brokers hits a sweet spot by meeting the needs of sophisticated investors at an affordable price. I think it's one to buy, hold, and ignore.
Google? That's just kindling for a much bigger fire
Anders Bylund (Alphabet): Alphabet is reportedly the most popular stock among hedge-fund managers nowadays. In a recent review of the 50 largest hedge funds, Citi Research analyst Tobias Levkovich found 16 listing Alphabet among their 10 largest holdings.
That's hardly surprising, since Google's parent company sports the second-highest total value in today's stock market. Neither the smart money nor the general market makers are right all the time, but I would argue that those hedge-fund gurus are onto something here.
The cash machine that Google built is slowly turning into a much broader and deeper business model. Armed with a basket of game-changing products such as self-driving cars, advanced medical research, and smart-home monitoring systems, Alphabet is transforming into a diversified conglomerate. A lot of its new ideas have almost nothing to do with Google's online search and advertising operations.
In short, this company is building itself into a stable cross-sector giant for the long haul. Buy Alphabet shares now, stick them under your pillow, and sleep tight for the next several decades. When you check back, you'll likley find those stubs representing a very different business -- and that beast will be worth many times the piddly $650 billion market cap it sports today.
The everything company
Keith Noonan (Amazon): What started as "the everything store" is gradually becoming "the everything company," and Amazon stock stands as a hedge-fund favorite that retail investors should consider buying and holding for the long term. At the end of the last year, 41 of the top hedge funds owned the online retail giant, and institutional confidence in the company makes a lot of sense.
The retail transformation toward e-commerce is still in its early phases, and Amazon is positioned to remain both one of its biggest beneficiaries and biggest drivers. Though online retail grew 16.2% year over year in the second quarter, it still accounted for just 8.9% of total retail sales according to the U.S. Department of Commerce. Amazon's e-commerce business has big room to grow in international markets, as well, with just 36% of its online store sales coming from non-domestic territories last quarter.
The company's cloud-services business is also growing sales and profits at a rapid clip, with revenues up 42% year over year last quarter, and operating income up 28%. It looks likely to be a performance driver for years to come.
Amazon isn't resting on its laurels, however. It's back on a big spending kick, investing in content production, improving Amazon Web Services, and making an acquisitions push that includes its recent $13.7 billion purchase of grocery chain Whole Foods. While earnings per share came in at $0.40 last quarter compared to $1.78 in the prior-year period, investors can actually be relieved that the notoriously forward-thinking company is positioning itself for long-term success.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alphabet (A shares) and Amazon. Jordan Wathen owns shares of Interactive Brokers. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool both owns shares of and recommends Alphabet (A and C shares) and Amazon. The Motley Fool also recommends Interactive Brokers. The Motley Fool has a disclosure policy.