Now’s the time for stock pickers to shine.
The rapid sell-off and equally rapid rebound in the stock market over the last few months has caused mispricings across the board and created massive disparities between sectors and stocks – an environment made for active managers trying to beat the market after lagging during the bull run.
“It makes sense to be surgical now more than ever,” said Ron Carson, CEO and founder of Carson Group, an advisory based in Omaha, Nebraska. Last quarter, Carson’s firm added an active strategy to its U.S. stock allocations and the firm is now in the process of switching all of its developed international allocation to active funds from a 50-50 split.
“When the economy is humming along, the rising tide raises all boats,” Carson added. “But we’re going to see a major contraction this quarter and massive volatility. To find companies gaining market share even if their prices are going down takes a manager digging into a company’s debt structure, free cash flow, fundamentals. Talking to suppliers, looking upstream and downstream. Hours of homework.”
So what stocks are active managers buying now?
Analysts from Goldman Sachs looked at $4 trillion in stock holdings of large-cap mutual funds and active hedge funds to see where they overlap.
The Goldman analysts pointed out that what these active managers are doing now is just as important as how they are doing it, explaining that “fund returns are typically strongest during period[s] of high return dispersion,” suggesting that more volatile markets make the gaps between winners and losers wider.
According to the analysts, over the last decade, an average of 31% of large-cap mutual funds have beaten their benchmarks. But so far this year, 44% have delivered beats, with the average hedge fund up 1% year-to-date compared to the S&P 500’s 8% loss.
So far this year, both active hedge funds and mutual funds have upped their exposure to healthcare, particularly biotechs and pharmaceuticals, while being underweight the tech sector.
But while these active funds have held big positions in the so-called FAAMG stocks—Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Google-parent Alphabet (NASDAQ: GOOGL, GOOG)—Goldman identified twelve other stocks that are “shared favorites” between mutual funds and active hedge funds.
Their list includes names like Bank of America (NYSE: BAC), Bristol-Myers Squibb (NYSE: BMY), Crown Holdings (NYSE: CCK), Comcast (NASDAQ: CMCSA), Salesforce (NYSE: CRM), Mastercard (NYSE: MA), ServiceNow (NYSE: NOW), PayPal (NASDAQ: PYPL), UnitedHealth Group (NYSE: UNH), and Visa (NYSE: V).
Of these, Wall Street sees the most upside ahead for Bank of America, Crown, Comcast, and Bristol-Myers Squibb, with analyst’ average price targets of 17%, 12.5%,12.5%, and 10%, respectively.