Even though many hedge funds had an awful 2018, they are still very popular with high net worth and institutional investors. One reason they remain popular is that many hedge funds are very nimble and can move in and out of positions quickly if needed. Plus, they tend to chart their own paths instead of following Wall Street trends, which can be a plus with the right fund manager.
A new Jefferies report looks at the positioning for high and low turnover hedge funds. We remain far more interested in the low turnover funds, as they tend to be more conservative and less reactionary. This is the second time this year that Jefferies team has covered hedge fund turnover, and once again the lower turnover funds tend to do better.
The Jefferies report noted this:
Looking at the performance and making the assumption that nothing changed between 12/31 and 3/31, we found that the Low Turnover managers posted better results, at 19.7% versus the High Turnover at 15.9%. The good news is that both beat the S&P 500. The Low Turnover portfolio was aided by a big overweight to Health Care, which had a good first quarter. However quarter to date, performance has weakened.
Jefferies offered a list of the top buys that the low turnover hedge funds made, all of which had a very positive first quarter. We screened the top five buys against our 24/7 Wall St. research database to find firms that had Buy ratings.
Caesars Entertainment
This well-known old-school gaming company is offering solid upside. Caesars Entertainment Corp. (NASDAQ: CZR) provides casino-entertainment and hospitality services, and its resorts operate primarily under the Harrah’s, Caesars and Horseshoe brand names.
Caesars facilities include gaming offerings, food and beverage outlets, hotel and convention space, and non-gaming entertainment options. Caesars Entertainment is one of the largest gaming companies in the world and currently owns or operates 49 casino properties in 13 states and in four other countries.
Activist investor Carl Icahn is said to be building a massive position in the company, which could be very positive for Caesars investors.
The SunTrust price target for the shares is $11, and the Wall Street consensus target was last seen at $11.11. The stock closed Tuesday’s trading at $8.93 a share.
The huge social media leader had an absolutely wretched 2018 but has rallied back smartly. Facebook Inc. (NASDAQ: FB) is the largest social network with over 2.0 billion monthly active users and over 1.4 billion daily active users. The company generates revenue from advertising and from payments, with over 95% of revenue from advertising. It generates close to 50% of revenues in the United States and Canada and is expanding rapidly in international markets.
The company’s solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends. Messenger, a messaging application for mobile and web on various platforms and devices, enables people to reach others instantly, as well as enable businesses to engage with customers. WhatsApp Messenger is a mobile messaging application.
Jefferies has a price target of $230, and the posted consensus target is $221.50. The shares closed trading most recently at $184.31 apiece.
24/7 Wall St.Western Midstream Partners
This is a defensive play with a great balance sheet and limited commodity price risk. Western Midstream Partners L.P. (NYSE: WES) is a growth-oriented master limited partnership formed by Anadarko Petroleum to acquire, own, develop and operate midstream energy assets.
Western Gas Partners has midstream assets located in the Rocky Mountains, the Mid-Continent, north-central Pennsylvania and Texas. The company is engaged in the business of gathering, processing, compressing, treating and transporting natural gas, condensate, natural gas liquids and crude oil for Anadarko, as well as for other producers and customers.
The company looks to be well positioned to drive above-average distribution growth over the next several years through organic growth opportunities across its liquids-rich areas. Highly visible above-average distribution growth potential coupled with a predominantly fee-based/fixed-price revenue stream and investment grade balance sheet warrants a premium valuation to peers.
Shareholders are paid a large 8.09% distribution. The $35 Citigroup price objective compares with the $38.27 consensus target price. The shares were last seen trading at $30.17.
Netflix
This Wall Street darling could still offer solid upside despite newly announced streaming competition. Netflix Inc. (NASDAQ: NFLX) is the world’s leading internet television network, with more than 120 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films.
Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Netflix is available on virtually any device with an internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on the available bandwidth.
Many of its titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they will love.
Merrill Lynch has set its price target at $450. The posted consensus target is $387.03, and the shares closed at $354.78 on Tuesday.
RingCentral
This smaller cap company could be a great takeover target. RingCentral Inc. (NYSE: RNG) offers a cloud-based solution for business communications that replaces legacy and expensive on-premise communications systems. It is delivered as an application that follows the user regardless of device (office phone, smartphone, desktop, tablet). Features include voice, text, fax, audio conferencing and integration with document and customer relationship management systems.
For some time, Merrill Lynch analysts have believed the company has multiple catalysts, including continued traction with mid/enterprise customers, increased partner traction, international expansion and continued dislocation in the industry from legacy PBX/UC vendors.
The Merrill Lynch price target is $135. The consensus target for the shares is $134.06, and the most recent share price was $122.16.
These top stocks that low turnover hedge funds are buying are all great picks for growth portfolios looking for total return or alpha generation. They are strong players in their specific categories, which is a plus for long-term investors.
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