The second quarter of 2022 saw the U.S. Federal Reserve continue hiking interest rates as inflation remained sky-high. Unless companies can raise their profits more than 9% year over year to surpass inflation, they are effectively seeing their profits decrease on an inflation-adjusted basis, which is not exactly a recipe for a bull market.
As investors anticipated lackluster earnings reports, the S&P 500 was down 17% over the course of the three months through the end of June, while the Nasdaq lost 22% and the Dow Jones Industrial Average dropped 5%.
Seeing share prices fall may be discouraging, but for value investors, that also means more opportunities are emerging. According to GuruFocus’ Hot Picks, a feature which allows investors to screen for the stocks that had the highest number of guru buys or sells based on the most recent regulatory filings, here are the five most popular stocks from gurus during the second quarter, as determined by net buys.
Investors should be aware that the data in this article is based on 13F filings for investing firms and portfolio updates for mutual funds, which do not provide a complete picture of a guru’s holdings. The 13Fs include only U.S. common stocks, while the mutual fund updates typically include both U.S. and foreign common stocks. Neither include other assets or investments such as bonds, credit, etc. All numbers are as of the quarter’s end only; it is possible the gurus may have already made changes to the positions after the quarter ended. However, even this limited data can provide valuable information.
Citigroup
In the second quarter, there were 19 gurus buying shares of Citigroup Inc. (C, Financial) while five sold the stock, resulting in 14 net buys. This is the fourth quarter in a row where gurus have been net buyers of the stock.
Buyers included First Pacific Advisors (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio), while sellers included Jeff Auxier (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio) and Primecap Management.
As a bank major, Citigroup suffered the industry-wide beatdown due to record-low interest rates in 2020 and 2021, but its net interest income is set to rise again with the U.S. Federal Reserve beginning to hike interest rates again to mitigate persistently high inflation. While there are worries that a recession might hit bank earnings hard, the bank did successfully pass its stress test in June, though its CET1 ratio was worse than analysts had expected.
Citigroup in particular may have a brighter future due to its ongoing transformation plan under CEO Jane Fraser. The company intends to exit its consumer banking franchises in 13 markets to free up capital for its digital transformation. For example, in March, it announced that it has agreed to sell its India consumer business to Axis Bank Ltd. (BOM:532215, Financial). It also won a prestigious Digital Transformation Innovation Award for its artificial intelligence software, which enables the virtualization of the planning, running and scaling of digital technology performance tests.
Cognizant Technology Solutions
Cognizant Technology Solutions Corp. (CTSH, Financial) had 15 guru buyers during the quarter and just one guru seller, resulting in 14 net buys. This stock has been a net buy among gurus often during the past few years.
Baillie Gifford (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio) were among those buying the stock during the quarter. The lone seller was Dodge & Cox.
Cognizant is an information technology and services company which operates in four groups: financial services, health care, products and resources and communications, media and technology. While the financial services group accounts for the biggest chunk of revenue (around 30%), the products and services group is growing the fastest, followed closely by communications, media and technology.
The services that Cognizant provides to clients are expected to see a growing customer base in the coming years as more and more businesses focus on transforming themselves with modern technology. Technology has great potential to streamline businesses, reduce expenses and allow companies to provide products and services to more customers than ever before, and Cognizant exists to help with these processes.
HCA Healthcare
HCA Healthcare Inc. (HCA, Financial) was bought by 16 gurus and sold by three gurus, resulting in 13 net buys for the second quarter. After many quarters of bearishness, gurus have finally turned bullish on this stock in the recent quarter.
Jim Simons (Trades, Portfolio)' Renaissance Technologies, Mario Gabelli (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) were among the buyers, while the sellers included Glenn Greenberg (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Hotchkis & Wiley.
HCA Healthcare is a for-profit operator of hospitals, with 182 hospitals and more than 2,300 care facilities located in the U.S. and the U.K. The health care industry in general may get a bad rap among investors, but it is mostly the fervent betting market surrounding biotech startups that makes investing in the sector look bad; profitable companies such as hospital owners and pharmaceutical companies can do quite well for themselves and their investors.
This is not your ordinary hospital operator, though; HCA collects and analyzes the vast amount of data that it gains from more than 35 million annual patient encounters. It then uses this data to develop new technologies, IT services, infrastructure operations and more. For example, its CereCore provides electronic medical record solutions, while HealthTrust provides systems that facilitate group purchasing, supply chain management, workforce management and data analytics.
Meta Platforms
There were 28 buying shares of Meta Platforms Inc. (META, Financial) and 17 gurus selling the stock during the quarter, resulting in 11 net buys. Gurus have been net buyers of the stock for two quarters in a row.
Those buying the stock included Bestinfond (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and Mark Hillman (Trades, Portfolio), while sellers included Baillie Gifford (Trades, Portfolio), Robert Karr (Trades, Portfolio) and Elfun Trusts (Trades, Portfolio).
Meta, formerly known as Facebook, is a true fallen giant. Apple (AAPL, Financial) threw a wrench it its ad machine by making it much more difficult for app-makers and advertisers to track users’ behavior across apps without their knowledge or consent. Add that to the whistleblower scandal that brought the company’s disregard for customer welfare into the limelight, as well the fact that its sites are a playground for scammers (especially Facebook Marketplace), and it becomes clear why the stock lost more than half its value and needed to rebrand itself entirely.
The company will likely find it difficult to grow going forward unless it can successfully follow through on the promises it made when it rebranded to Meta Platforms. It aims to basically repeat the success of Facebook in the so-called metaverse, which is the immersive 3-D version of the internet that users can access via virtual reality headsets and applications. This will be an expensive venture, but the key difference, as CEO Mark Zuckerberg touts, is that in the metaverse, there will be no Apple to slap rules on how it can collect and sell user data.
Walt Disney
There were 21 gurus who bought The Walt Disney Co. (DIS, Financial) in the quarter while 10 gurus sold the stock, resulting in 11 net buys. After years of being net sellers of the stock, more gurus were buying it in the recent quarter.
Simons' frim, Ray Dalio (Trades, Portfolio) and Sarah Ketterer (Trades, Portfolio) were among the buyers of the stock, while Paul Tudor Jones (Trades, Portfolio), Catherine Wood (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio) were among the sellers.
Disney has had a rough time over the past couple of years as its various in-person entertainment business, such as theme parks, resorts and cruises, were interrupted by the Covid-19 pandemic. Its streaming services, Disney+, has achieved huge success in terms of user growth but is not yet profitable, and it likely will not be for a while due to the surge of competitiveness in the streaming market where Netflix (NFLX, Financial) alone used to reign supreme.
Now that customers are once again flocking to theme parks and other forms of in-person entertainment, Disney is seeing these parts of its business recover rapidly with pent-up demand. On the Disney+ side, the company expects the streaming service to be profitable by fiscal 2024. The company would need to roughly triple its quarterly earnings per share in order to be undervalued at the current level, so the stock is not without risk, but rapid recovery or gaining ground on Netflix in the streaming business could bring higher valuations.
