I like to check out the biggest holdings of the major mutual funds, for two reasons. It shows which names are already loved by the Street and at risk of becoming less loved, and vice versa. Second, the guys and gals at the big fund complexes are smart and very well informed; managements of the companies they own or might own are in their offices regularly, and analysts and salesmen are constantly phoning with the latest company tidbits and industry insights. If a couple of funds have a major position in a name, it tells me the fundamentals are probably solid.
I looked at the top 10 holdings of 18 large-cap growth funds run by Vanguard, Fidelity, T. Rowe, and Gabelli—173 positions in all because the funds owned some bonds and foreign stocks. Here are the takeaways:
- The most popular sectors by far are tech (49 positions, or 28% of the total of 173) and healthcare (44 or 25%). So over half of all the positions were in these two sectors.
- The most popular stock was Apple, the top holding of 8 of the 18 funds; in all 9 funds own it. Other popular tech stocks are Google (9 funds own it), Microsoft (6 funds), and Facebook (7 funds). Qualcomm is a bit unloved with just one fund owning it. Intel is not a top 10 holding of any of the funds; neither is IBM.
- Popular healthcare names include Biogen IDEC (6 funds), JNJ (5 funds) and Gilead (5 funds). “Big pharma,” broadly defined, is popular, with Roche, Lily, Merck, Pfizer, Novartis, AbbVie, Bristol Myers and Amgen collectively accounting for 21 of the 173 positions.
- Financials are not popular; the favored bank is Wells Fargo (6 funds own it) followed by JP Morgan (3 funds).
- The industrial sector is un-loved; together 3M, Honeywell, GE and Danaher account for just 7 positions of the 173.
- Also unloved are staples stocks; P&G, PepsiCo, and Coca-Cola are each top holdings of one fund. (To me, this makes sense; the stocks are expensive and earnings are not growing much.)
- Retailers are not particularly popular, but three funds do like the auto parts space (Advanced Auto, Genuine Parts, Autozone) and three funds count Home Depot among their top holdings. TJX and Starbucks are also represented.
- Other names owned in size by the funds include Crown Castle (wireless infrastructure), Zoetis (animal health), Disney, McKesson, Marsh and McLennan, Thermo Fisher, Nike, CVS, and United Health.
- A few funds own the credit card companies, Visa and MasterCard; however their popularity seems to be fading.
I own 16 of the stocks owned in size by these funds, so I can’t say I disagree with their views. That said, healthcare looks rather over-owned and in some cases quite expensive, though I agree it is the sector with the best earnings and revenue momentum. Don’t forget that blockbuster new drugs usually replace drugs already on the market, and healthcare does have exposure to the strong dollar and weak overseas economies. On the other hand, industrial stocks seem too unpopular. The XLI climbed just 6.2% over the last year versus 10.3% for the S&P 500, even though the U.S. economy is accelerating and many industrial companies are producing quite respectable EPS growth despite the strong dollar. (Admittedly the collapse in energy prices is a new headwind for some industrial stocks, albeit positive for others.) I think it is bullish for consumer durables such as restaurants, retailers and apparel that they are not popular holdings even though both revenue and margins should benefit from lower oil prices.
Copyright Thomas Doerflinger 2015. All Rights Reserved.
