We recently made a list of Goldman Sachs’ List Of Stocks Popular With Mutual Fund Managers: Top 20 Stocks. In this piece, we will look at where F5, Inc. (NASDAQ:FFIV) ranks among the list of stocks that mutual funds are buying according to Goldman Sachs.
As the fourth quarter of 2024 starts, the market is once again back to debating about the Federal Reserve’s interest rate cuts. The latter half of September saw some much overdue optimism on Wall Street as the Federal Reserve kicked off its rate cut cycle through a 50 basis point cut. Since the day of the rate cut and the close of September, the flagship S&P and the broader NASDAQ index gained 2.6% and 3.5% respectively.
However, the start of October saw the return of nervousness that investors have been dealing with since the start of the rate hiking cycle and worries of a recession. The S&P and the NASDAQ dropped by 1.1% and 1.5% after labor market data saw the US market add 254,000 in nonfarm payrolls and 8.040 million overall jobs measured by the Labor Department’s JOLTS survey. Both of these releases beat economist expectations, leading to sharp drops in markets as investors now factored out a 50 basis point cut at the next meeting of the Federal Reserve.
The latest drops despite a strong labor market are indicative of how investors expect nothing but a perfectly balanced data set since in August, Magnificent 7 stocks, which are generally dependent on robust discretionary and corporate spending, lost $800 billion in market value after unemployment jumped by 4.3% in July for its highest value since September 2021.
However, even though markets pared back their gains in October, the fact still remains that drops due to a strong labor market are nevertheless better than ones that follow a slow market. This is because the former scenario promises a robust economic outlook. Soon after the fresh labor data that caused jitters in October, investment bank Goldman Sachs was out with yet another 2024 target for the benchmark S&P index. The bank now expects the S&P to close 2024 at 6,000 points, a sizeable bump over its first 2024 target of 4722 points, with the latest estimate being its fourth revision of the 2024 target so far. The first revision saw the bank bump up 2024’s S&P closing estimate to 5,100 points in late 2023, and two subsequent revisions saw further upside as it predicted that the index would close out at 5,200 and 5,600 points.
The latest revision now sees the bank estimate that the index will close at 6,000 points – for a 4.3% upside over the recent closing value of 5,751 points. It is based on the bank’s optimism about the third quarter earnings cycle, as the index revision was followed by an upward earnings revision as well. Heading into earnings, Goldman believes that in 2025, the S&P’s earnings per share will now sit at $268. This is a 4.7% upward revision from the bank’s previous estimate of $256 and it assumes that earnings will grow by 11.2% next year over the 2024 earnings estimate of $241. This isn’t the only growth estimate in the banks’ latest market outlook since the report also sees it introduce an S&P earnings target for 2026. As per Goldman, in 2026, the S&P will deliver earnings per share of $288 to mark a 7.4% annual growth and a stronger 19.5% growth over this year’s earnings.
For a market that first struggled with worries of a recession in August and is now re calibrating expectations for the interest rate cut cycle, it’s important to see what’s driving the bank’s optimism. Led by chief US equity strategist David Kostman, analysts have built their optimism on the back of strong economic performance. In the note, Kostin comments that his firm’s “forward EPS estimates reflect a steady macro outlook.” He adds that “the primary driver of the upward revision to our 2025 EPS estimate is greater margin expansion,” since the “macro backdrop remains conducive to modest margin expansion, with prices charged outpacing input cost growth.” This backdrop, as you might expect, is driven by bullish expectations about the US economy. As per Kostin, the 2025 EPS estimate is driven by Goldman’s assumption that “sales will grow by 5%, roughly in line with nominal GDP growth (vs 4% previously).”
Yet, despite the optimism, the analysts are also wary about short term turbulence in the stock market. October is the last month before a hotly contested US presidential election, and investors have also felt jitters from ongoing hostilities in the Middle East. Consequently, Kostin warns that as “everyone is in the pool” right now, with the election looming and the mutual fund fiscal year ending on October 31st, stocks could see some shifts as the big players rotate their positions. As an example of the volatility that the market is facing right now, the analyst points out that the Chicago Board’s CBOE volatility index jumped by 30% over the past five trading days to signal that “volatility is no longer the coach on the sidelines: it is the player on the field.”
Speaking of mutual funds, they’ve done quite well this year. We took a look at the brief performance of mutual funds as part of our coverage of Goldman Sachs’ Top Fund Manager Stock Picks: 25 Best Overweight Stocks. This revealed that as per BofA, during the first quarter, 64% of actively managed mutual funds beat their benchmarks during Q1, for their best set of performance over the past 17 years. This also marked a significant improvement over last year’s performance when 38% of these funds had beaten the benchmarks.
The Fed’s interest rate cut also means that hedge fund shifted their positions. Financial services firms and banks in particular benefit from interest rate cuts as their deposit costs drop and they can earn more by maintaining existing rates. Consequently, according to Goldman, in the week before the Fed interest rate cut, hedge funds bought banks and financial services stocks at the fastest pace since 2023. This falls in line with what UBS Wealth Management’s Brad Bernstein shared in his comments after the rate cut when he explained that lower rates make financials attractive since “the improving yield curve for their balance sheet and what that means for their ability to lend at higher rates and pay cheaper rates on cash savings.”
Our Methodology
For our list of Goldman Sachs’ top stocks that are popular with mutual fund managers, we used the bank’s list of 20 Russel 1000 stocks that mutual fund managers had grown their positions in during Q2 2024. The stocks are ranked by the number of funds that increased their portfolio allocation versus those that had decreased it.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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F5, Inc. (NASDAQ:FFIV)
Number of Mutual Funds: 17
Number of Hedge Fund Investors in Q2 2024: 25
F5, Inc. (NASDAQ:FFIV) is a software as a service (SaaS) company. It provides cloud based security products that allow users to virtually and securely work with their software. It is one of the more interesting SaaS stocks that you’re likely to come across since F5, Inc. (NASDAQ:FFIV) has successfully transformed itself from providing information technology hardware products to cloud computing software. This has proven to be quite important, as the growth in cloud computing has led a host of businesses to shift away from expensive hardware deployments to cheap, lean, and specialized virtualization software products. Additionally, IT spending has slowed down in today’s high interest rate era, and investors were impressed with F5, Inc. (NASDAQ:FFIV)’s ability to pivot into software in July when they sent the shares soaring by 13%. This was after the firm’s fiscal third quarter results that saw its revenue and EPS of $695 million and $2.44 beat analyst estimates of $686 million and $1.98. The high margin software business has served F5, Inc. (NASDAQ:FFIV) well, as while its revenue dropped from the year ago figure of $395 million, in Q3, net income grew from $89 million to $144 million. Looking forward, guidance beat for the full year could create tailwinds while troubles with software subscription renewals could create headwinds.
During the Q3 2024 earnings call, F5, Inc. (NASDAQ:FFIV)’s management commented on what its witnessing in its hardware product demand:
“Look, I think we have seen hardware stabilize over the last several quarters as customers have digested inventory. And over the last several quarters, we have seen a number of customers still sweating their assets in the current macro-environment, but we’re starting to see that change. And so for this year, we are about at the levels we think we’re going to be this year. But going into next year, our view is that there — the demand signals on hardware are pretty good. And so our expectations is that hardware, next year, will certainly not decline, possibly could be up relative to this year. And it’s driven by a few use cases, Tim. Number one is we have a strong pipeline of tech refresh activity and this is largely from customers that have digested their inventory or customers that were sweating assets and no longer can do that at this point.
And we’re starting to see that the close rates on this pipeline are going to be pretty strong. Specifically in the service provider space where they have sweated assets very aggressively, we’re now starting to see large programs come up again for CapEx in hardware in service provider. And also, we’re starting to see AI as a catalyst on the horizon for hardware. So, specifically for the few large enterprises or service providers that are building large AI factories. And one of the big issues in building these large GPU clusters, obviously, is the cost of training these models. And our technology specifically are high capacity, high performance, traffic management technology, BIG-IP is perfectly suited to improve the efficiencies of these large AI factories and thereby reduce the cost of them.”
Overall FFIV ranks 15th on our list of the stocks popular with mutual fund managers according to Goldman Sachs. While we acknowledge the potential of FFIV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FFIV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey. All investment decisions should be made after consulting a qualified professional.