What are the most popular stocks among institutional investors? A lot of them are major corporations with a value tilt, including once-hot tech stocks that have taken a pasting in the 2022 market rout.
The top three on the allocator buy list for last year’s third quarter are beaten-up tech stocks: e-commerce giant Amazon, Google-parent Alphabet and electric vehicle maker Tesla, according to a study by the financial information site MarketBeat, which surveyed a boatload of filings. Over the past 12 months, those three stocks are way down: Amazon lost 40%, Alphabet 30% and Tesla 66%. In all, there are 13 on the list.
“Institutional investors don’t get easily swayed by the hot stocks of the day that are popular with retail investors,” according to the MarketBeat commentary. “They are disciplined. They don’t take dumb losses.” In fact, this tech trio figures high among the holdings of the California Public Employees’ Retirement System, the nation’s largest pension program.
To the MarketBeat site analysts, the common thread of institutions’ top equity choices is that that their fundamentals are solid. “When institutions start to pour money into a company, it’s because they have done extensive analysis and believe a company is undervalued compared to the broader market,” its analysis pointed out. Most of the allocator favorites have affordable price/earnings ratios, with the exception of Amazon, at a lofty 89, and Tesla, with a 40 multiple.
Only one of the leading three stock choices for allocators has had a rocky time with earnings, but all three have worries. Last year, Amazon booked two negative quarters before returning to profitability in the third period. Alphabet is fretting about a slide in online advertising, its lifeblood, in a possible recession. Tesla has had to weather the distraction of CEO Elon Musk, its largest shareholder, as he sold chunks of his holdings in the auto company to underwrite his adventure taking over social network Twitter.
Other allocator preferences are for media/entertainment, as embodied in stock purchases of Warner Bros. Discovery and Paramount. Both are down, with Warner the worst, losing half of its share price over the past 12 months. Warner also has high debt and, for earnings, has suffered two negative quarters.
Another pair that institutions are fond of are exchange-traded funds for long-term Treasury bonds, which haven’t done well in recent times amid high inflation and rising interest rates. The iShares 20+Year Treasury Bond ETF and the iShares 7-10 Year Treasury Bond ETF are off significantly.
Why purchase such turkeys? One obvious answer is that the allocators believe the value stories attached to each of these securities. You can spin a convincing argument that the big tech players have a strong history of innovation and that huge entertainment companies have long captured the public’s imagination, so their current problems can be ironed out. As for the Treasury ETFs, unless Congress sabotages them, U.S. government bonds have been hard to beat over time.
The top 13 buys by allocators in 3Q 2022:
Edwards Life Sciences
Warner Bros. Discovery
iShares 20+Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF