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The fact about momentum is there are price reversals at very short horizons and then positive momentum for 6 to 12 months, according to Owen Lamont, a hedge fund manager and a former professor at the Yale School of Management.

The following are the top 10 stocks owned by an overwhelming majority of hedge funds. Data is compiled by MarketFolly from the most recent SEC 13F filings:

Top 10 Stocks Owned by Hedge Funds

Name (Symbol)

P/E

Forward P/E

PEG Ratio

Apple Inc. (NASDAQ:AAPL)

22

16

1.2

Bank of America (NYSE:BAC)

-

8

3.5

Google Inc. (NASDAQ:GOOG)

23

16

0.9

Microsoft (NASDAQ:MSFT)

13

11

1.5

JP Morgan Chase (NYSE:JPM)

14

8

1.5

Pfizer, Inc (NYSE:PFE)

14

7

2.7

CIT Group Inc (NYSE:CIT)

26

13

2.5

Intel Corporation (NASDAQ:INTC)

19

11

1.1

QUALCOMM (NASDAQ:QCOM)

19

14

0.8

Cisco Systems (NASDAQ:CSCO)

19

13

1.2

All these 10 stocks have forward P/Es of less than 17 and their short ratios are very low. These very important positions (VIP) belong to 3 sectors: technology, financial and healthcare.

Technology

Out of 10, 6 are from the tech sector: AAPL, GOOG, MSFT, INTC, QCOM and CSCO. Intel boosted first-quarter revenue 44% from a year earlier. With an increasing surge of mobile and clout computing, Cisco predicts a four-fold increase in Internet traffic in four years. One of the hot trends is that the mobile device market will outpace or perhaps even replace the PC market in the next five years. This market grew 56.7% during the first quarter of 2010, according to Money magazine.

If you don’t want to predict the winner from these top 6 tech stocks, then ETFs such as Technology Select Sector SPDR (NYSEARCA:XLK) or PowerShares QQQ (QQQQ) is your choice.

Financials

JPMorgan (JPM) earnings jumped 57% to $3.3 billion in the first quarter 2010. The company plans to add almost 9,000 jobs in the U.S. However, future profits for big banks such as JPMorgan and Bank of America (BAC) could be hurt by financial reform bill. As a matter of fact, some traders have already left Wall Street firms since political momentum began building to limit trading profits. In addition, another big debt crisis shock from Europe or Asia might have dire consequences for these big banks.

With market cap of $7 billion, CIT Group (CIT) is the smallest company in this top 10 list. Not only have 48 hedge funds increased their positions on CIT in the 1st quarter of 2010, two CIT insiders also bought this stock recently: one on May 7, 2010 and another on March 18, 2010.

Healthcare

One of the investor concerns is that with Pfizer's (PFE) blockbuster cholesterol drug, Lipitor, coming off patent, earnings will be significantly reduced. Nonetheless, with strong cash flows, the downtrend potential is very limited.

Top 12 New Stocks Hedge Funds Bought in Q1 2010

Followings are 12 new stocks appeared on the largest holdings of hedge funds. CIT also appears in this list:

Name (Symbol)

P/E

Forward P/E

PEG Ratio

CIT Group Inc (CIT)

26

13

2.5

CF Industries (NYSE:CF)

10

7

0.6

Alcon Inc (NYSE:ACL)

20

17

1.5

Coca-Cola (NYSE:CCE)

16

14

2.4

Kraft Foods (KFT)

10

12

1.9

Xerox Corporation (NYSE:XRX)

21

8

-

Assured Guaranty (NYSE:AGO)

7

4

0.7

Baidu, Inc. (NASDAQ:BIDU)

97

38

1.3

Equinix, Inc. (NASDAQ:EQIX)

51

30

3.1

Gilead Sciences (NASDAQ:GILD)

11

9

0.7

Liberty Global. (NASDAQ:LBTYA)

11

-

-

News Corp (NASDAQ:NWSA)

23

12

1.0

Some of these stocks have very high forward P/E, such as Baidu and Equinix. From a PE/G point of view, Baidu is not too expensive because its PEG ratio is only 1.3, even lower than Microsoft’s 1.5. However, Baidu’s sky-high Price/Sales ratio of 37 could scare away value investors.

Conclusion

Poor U.S. jobs data, a wobbly European economy and fresh fears of the Hungary debt crisis tumbled stock markets over the last few days. However, there have been clear and broad-based improvements in underlying economic trends, including most recently, strong German factory data.

Value stocks, unlike lottery tickets, or growth stocks, don’t hold out the promise of a dream. Because they are boring, with real but limited growth, the market discounts them and they fall in price, according to David Adler, author of Snap Judgment.

Momentum investors expect short to intermediate term reward from trend continuation. With a combination of value analysis and momentum trend, you might be able to profit by following the hedge fund universe’s top positions: there might be a short window of profit period which could last a few weeks to few months.

Disclosure: Long QQQQ. Data are from MarketFolly.com and Yahoo Finance and is valid as of June 6, 2010.

Source: Top Stocks Owned by Hedge Funds