Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

Goldman Sachs: Follow the ‘Smart Money’ Stocks


Investors tend to focus on stocks that hedge funds are buying. Or stocks that mutual funds are buying. But Goldman Sachs has found that it is the stocks that overlap both these categories that are delivering the strongest returns right now.

“Great minds think alike,” Goldman Sachs’ David Kostin wrote in a report. “The median shared favorite is expected to have higher margins and faster growth in 2019 than the median S&P 500 stock.”

Since 2013, this group of stocks has brought an annualized return of 19% percent, beating both Goldman’s hedge fund and mutual fund baskets and the S&P 500’s 14% gain, Kostin said.

To pinpoint these stocks, the bank delved into the portfolios of 880 hedge funds with $2.1 trillion of gross equity positions. It also considered the recent trades of 521 large-cap mutual funds with $2.1 trillion of equity holdings.

Its study revealed that there are now 13 stocks that are popular with both hedge funds and mutual funds. That’s up from the usual number of 11. Here we can use TipRanks data to assess the outlook for 4 of these “shared favorite” stocks.

Let’s take a closer look at what the analysts have to say now:

ServiceNow: Did You Miss the Train Ride?

Year-to-date cloud platform ServiceNow (NOW) has surged by 30%. A strong quarter led to a wave of bullish analysis from the Street. Q4 subscription revenue and subscription billings came in ahead of the guidance, with the billings growth the highest in over seven quarters.

However it also means that the average price target from top analysts is now only 3% above the current share price. Goldman Sachs’ Christopher Merwin has a buy rating on NOW and a Street-high price target of $275. That suggests more compelling upside potential of 18%. He believes a rich product roadmap, and ongoing momentum will help to sustain above 30% topline growth through FY20E – 2% above what the Street expects.

UBS analyst Jennifer Swanson Lowe also highlights how new products are driving robust growth: “Subscription software revenue growth typically decelerates on increasing scale, but ServiceNow’s ability to hold constant currency growth relatively steady at around ~40% for three years in a row is evidence that products outside of core IT Service Management (ITSM) are kicking in as meaningful drivers.” (Get TipRanks’ free stock analysis report on NOW)

Alphabet: A Solid FANG Stock to Own Right Now

Google parent Alphabet (GOOG) is one of the FAANG stocks to make the cut. In fact, Alphabet is the only stock that has been a favorite by both industries for 18 quarters.

Top analysts are unanimously bullish on GOOGL’s prospects. Take RBC’s Mark Mahaney. He has just reiterated his Alphabet ‘buy’ rating with a $1,300 price target (12% upside potential).

“The largest Ad Revenue-based ‘Net business has now averaged 23% growth for 36 straight quarters & shows no signs of slowing. Despite a $160B revenue run-rate” cheered the analyst following earnings. Q4 Revenue came in just above expectations, though Operating Income came in below.

And looking forward there’s plenty of reason for continued optimism. Investments in Cloud, Internet-connected Homes, and Autonomous Vehicles potentially set the company up for many more years of premium growth & profits. (Get TipRanks’ free stock analysis report on GOOG)

Visa Gets Another Vote of Confident 

Credit card giant Visa (V) is another key stock to feature in Goldman Sach’s exclusive “shared favorites” category. Indeed, in Q4 hedge funds ramped up their V holdings by 1.75% to 118.544 million shares. In this case, the funds and the Street are aligned in their appreciation for this outperforming stock. Shares are up 12% year-to-date following results for 1QFY19 that came in above expectations.

“We maintain our Overweight rating on Visa and our 12- month PT of $160” states Cantor’s Joseph Foresi. With a top 10 analyst ranking, Foresi has a 100% success rate with his Visa stock recommendations.

He recently conducted a deep dive into Visa’s outlook. “We like Visa’s opportunity to capitalize on the global conversion of cash into credit, international opportunities, and digital payment tailwinds. Visa Direct, contactless payments, and B2B appear to be catalysts” the analyst stated.

With a $160 price target, Foresi concluded: “We remain attracted to Visa’s dominant position in the global card network market and to its strong, recognizable international brand.” (Get TipRanks’ free stock analysis report on V)

PayPal: Monetization and Marketplace Growth Make the Stock a Buy

Last but by no means least comes PayPal. Shares have surged 15% year-to-date following from a 17% climb in 2018. Good news for hedge funds- which ramped up holdings by 9% in Q4.

RBC’s Daniel Perlin sees two key metrics playing prominently in PYPL’s performance over the coming quarters including 1) the level/pace of Venmo monetization and 2) “New” marketplace growth vs. eBay’s runoff.

“We believe the combination of new monetized revenue streams and new marketplace and partner growth will more than offset the eBay runoff, beginning in FY19” concludes the analyst. While valuation is not cheap, Perlin sticks to his PYPL ‘buy’ rating and $105 price target (9% upside potential). (Get TipRanks’ free stock analysis report on PYPL)