Which Hedge Fund Stocks Are Actually Worth Buying?

Jimmy Butts's picture

Friday, October 26, 2018 - 12:00am

by Jimmy Butts

Every quarter when the latest 13-Fs are filed with the U.S. Securities and Exchange Commission (SEC), investors are eager to see which stocks the top hedge funds are holding. Did Warren Buffett's Berkshire Hathaway buy anything new? What about Bridgewater Associates, the world's largest hedge fund with more than $160 billion in assets under management? What have they bought or sold?

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It's interesting to see what some of the brightest minds in finance are holding, or not holding. News of a "buy" by, say, Buffett's Berkshire Hathaway (NYSE: BRK-B) sometimes leads to a small spike in the share price of that company, on the idea that Buffett knows what he's doing. Conversely, if the Oracle of Omaha decides to cut shares from his portfolio, the sheep often follow, sending shares tumbling.

By studying what the world's greatest investors are buying and selling, one can glean information that can have huge benefits in investing. You can try to pinpoint what exactly it is that these investors like, or don't like about a certain company. Maybe it's trading at a deep discount to cash flow or earnings. Maybe it acquired another company that will boost sales. Or perhaps there's another catalyst that is going to help the price of shares accelerate. Whatever the case might be, you can analyze their winners from the past to find characteristics those stocks shared before they made large gains.

Of course, this is much easier said than done. There are literally hundreds of stock holdings among the top hedge funds. To go through each one and identify the catalysts would take time – a lot of it. In fact, your research likely wouldn't be finished by the time the next waves of 13-Fs are released.

To make life easier -- and to save you a lot of headache -- I decided to unleash my Maximum Profit system on the top holdings across the biggest hedge funds. By doing so, we can pinpoint which stocks are doing well -- and are likely to continue doing well -- as well as find stocks with high cash flow growth.

Remember, cash flow is more predictive of a company's future than earnings. Accounting assumptions are applied to find earnings, and although those assumptions are made to provide an accurate picture of the company, they can mask problems. Cash flow is subject to few, if any, assumptions, and can provide a more accurate picture of a company's health.

This is why most institutional and hedge funders rely more on cash flow than earnings... yet, the only thing you hear about in the financial media is if a company beat or missed earnings. You can see the disconnect between what the big guys are doing versus what the media is telling individual investors.

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I searched the latest SEC filings of some of the biggest hedge funds out there. I also screened Buffett's Berkshire Hathaway, to find the stocks that are strong buys according to my Maximum Profit system. Take a look...

Here is a list of those companies that are considered "Buys" according to my Maximum Profit system. That means these are stocks that have the greatest chance of returning solid gains over the ensuing weeks and months.

A few stocks of these stocks held by the top hedge funders are also in our Maximum Profit portfolio (although, out of fairness to my subscribers, I can't reveal which...)

Then there's Fortinet (Nasdaq: FTNT), a recent holding that we sold on October 10. We booked our gains of roughly 20% in just under three months -- a 74% annualized gain.

There are a handful of more defensive stocks that are scoring quite well. For example, The Hershey Company (NYSE: HSY), Verizon Communications (NYSE: VZ) and AngloGold Ashanti (NYSE: AU) all sport Maximum Profit Scores above 70 -- which would qualify them as a "buy" according to my system. This tells us investors have been shaken by the recent market turmoil and have clearly become more defensive.

I will be on the lookout for further signs from the Maximum Profit system of where the market is heading. In my latest issue, for example, the system issued five new "buy" signals -- despite the recent market turmoil. If you'd like to learn more about how the system works and get access to my latest picks, simply go here.

Jimmy Butts does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.