Goldman Sachs recently published its Hedge Fund Trend Monitor report, which shows which stocks are best loved by hedge fund managers. Among big tech stocks, Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) stand out as particularly solid names from the list.
Hedge funds don't necessarily outperform the market with every stock pick, and it's important to do your own homework rather than blindly replicating others' investment decisions. Still, these three companies offer attractive upside potential over the long term.
Apple is delivering explosive growth on the back of booming demand for the iPhone 6 and iPhone 6 Plus. The company said total revenue spiked by 27% during the last quarter, reaching $58 billion. iPhone unit sales grew 40% to 61.17 million devices in the quarter, and U.S. dollar revenue in the iPhone segment was up 55% year over year to $40.28 billion.
Profit margins are on the rise, and Apple is also allocating tons of capital to stock buybacks, which increases earnings per share by reducing the outstanding share count. This allowed Apple to increase EPS by 40% in the last quarter, which is nothing short of breathtaking for the biggest corporation on the planet.
The company's balance sheet is pristine, with nearly $194 billion in cash, cash equivalents, and investments on its books. Even after deducting $40 billion in long-term debt and $3.8 billion in commercial paper obligations, this still leaves Apple with an enormous net cash position of over $150 billion. All this money provides massive financial firepower to continue rewarding investors with growing dividends and share buybacks over the coming years.
Apple stock also sells for a fairly reasonable price, trading at a forward P/E ratio around 14 times earnings forecast for the coming year. This is a discount to the S&P 500 index, which trades at a forward P/E ratio in the neighborhood of 18.
Unlike Apple, Facebook trades at a stratospheric P/E ratio of more than 30 times earnings estimates for 2016. This valuation incorporates aggressive growth expectations for the company, which can always be a source of risk for investors, particularly if Facebook hits a bump in the road and growth rates fall below expectations over the coming quarters.
On the other hand, Facebook is delivering spectacular performance for investors, and everything seems to suggest the social network founded and run by Mark Zuckerberg has plenty of room to run in the years ahead.
The company had 1.44 billion monthly active users as of the last quarter, with 936 million daily active users. Importantly, Facebook is evolving into a family of apps: WhatsApp has more than 800 million users, 600 million people use Messenger, and Instagram has more than 300 million active members.
Excluding the impact of currency fluctuations, Facebook grew revenue by 49% year over year in the last quarter. Mobile advertising revenue represented 73% of advertising sales, up from 59% in the first quarter of 2014, so Facebook is doing remarkably well in mobile, a crucial growth driver in the business.
Google stock has lagged the market lately: The online search giant has been basically flat over the last 12 months, while the Nasdaq Composite index gained over 20% in the same period. Investors seem concerned about the growing competitive threat from Facebook and other smaller players in the social media sector. While it's only natural to expect these companies to deliver higher growth rates than Google, this doesn´t mean Google is dead money at these levels. Far from that, short-term weakness in Google stock looks like a buying opportunity for long-term investors.
Google is the undisputed heavyweight champion in online search. Based on data from StatCounter, the company owns more than 90% in the global search market when considering both desktop and mobile. Search and YouTube generate most of the company's sales and earnings, while smaller initiatives such as Google Play, Nest, and Google Cloud offer interesting possibilities for the coming years.
Google is not growing as rapidly as Facebook, but the key variables are still moving in the right direction. Sales adjusted for currency fluctuations grew by a healthy 17% year over year in the last quarter, and the business produces fat profit margins in the area of 26% of sales at the operating level.
Google trades at a forward P/E ratio of about 16 times expected earnings. Considering the company's competitive strengths, rock-solid profitability, and market leadership in the promising online advertising business, this valuation looks like a convenient entry price for investors.
Andrés Cardenal owns shares of Apple and Google (C shares). The Motley Fool recommends Apple, Facebook, and Google (C shares). The Motley Fool owns shares of Apple, Facebook, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.