We recently compiled a list of 10 Best Stocks To Buy Right Now According To Billionaire Cliff Asness. In this article, we will look at where Microsoft Corporation (NASDAQ:MSFT) ranks among the 10 best stocks to buy right now according to billionaire Cliff Asness.
The investment approach of Cliff Asness, through his multi-billion dollar hedge fund AQR Capital Management, is quite unique. While some investors such as Warren Buffett and Seth Klarman focus on value, and others like Ken Fisher focus on growth, Asness’ fund tries to quantitatively define what quality is.
While it sounds like a tall order, the hedge fund investor whose latest net worth is estimated to be $2 billion, has written quite a bit on the determinants of a quality stock. One such work came in the form of a research paper published in 2013. In it, Asness and his co authors shared three primary drivers of a quality stock. These are a stock’s profitability, growth, and safety. Within these three factors, profitability is driven by gross profits over assets, return on equity, return on assets, cash flow over assets, gross margin, and the portion of earnings that was cash. A quality stock’s growth is determined by the five year average growth in the per share values of the first five profitability factors, while a stock’s safety is based on its beta, leverage, bankruptcy risk, and return on equity volatility.
Using these metrics, Asness built two portfolios. The first portfolio selected stocks based on the quality metrics, while the latter, called Quality Minus Junk (QMJ) goes long on the quality stocks and shorts the junk stocks. QMJ is more characteristic of AQR Capital’s investment approach. The results showed that without adjusting for risk, the ten sub quality portfolios starting from a quality score of one and ending at ten all had positive excess returns over Treasury bills.
These returns ranged from 28 basis points of excess returns for the lowest quality portfolio to 70 basis points for the highest quality portfolio. The difference in the highest and lowest returns for these portfolios was the sharpest when they were tuned for the Carhart Four Factor Model that adds momentum to the traditional three factor Fama Factor model. The difference was 105 basis points per month for the four factor adjustment.
Looking at the returns for the QMJ portfolio, these jump to 60 basis points for the four factor model for US stocks and 61 basis points per month for the three and four factor models for global equities. When the US and global monthly excess returns are plotted over time for cumulative alpha, they sit at roughly 425% for the US between 1957 and 2016 and at 200% for global stocks between 1986 and 2012.
Shifting gears, as 2023 proved to be beneficial to the stock market because of returns driven by large cap stocks and artificial intelligence, AQR Capital also posted strong results. As per Reuters, the fund’s Absolute Return Strategy delivered 18.5% in returns in 2023, while the AQR Equity Market Neutral Global Value strategy returned a stronger 20.6% in net returns. Before fees, the Absolute Return’s returns were 55%, with the net, or post fee returns sitting at 43.5% in 2022 according to Bloomberg,
AQR’s double digit performance continued during the first quarter. More data sourced by Bloomberg shows that AQR’s Managed Futures Full Volatility Strategy, Delphi Long Short Equity Strategy, and Apex Strategy gained 17.4%, 13%, and 11%, during Q1 2024. Insider Monkey’s data shows that the cumulative value of the hedge fund’s stock holdings filed with the SEC was $58.7 billion by the end of that time period marking a $13.1 billion or 28.7% annual jump. Double digit returns in a quarter are no small matter, and some of the best known hedge funds such as Citadel Wellington, Point72, and Millennium 5.8%, 5.3%, and 3.7% in respective returns during the same time period.
Before we get to our list of Cliff Asness’ top stock picks, it’s also important to see how his firms’ funds have performed so far during the year. September has marked the start of a paradigm shift on Wall Street in the form of the Federal Reserve starting its interest rate cuts in the form of a 50 basis point cut. However, the Fed’s data seems to have disappointed investors as it indicates that as of mid September, it expects the rate to sit at 3.25% – 3.50% by 2025 end.
When looking at the returns of AQR’s different funds year to date, it appears that momentum is one of the top plays as of now. This is because the AQR Large Cap Momentum Style Fund has delivered 21.70% in year to date returns which is roughly three percentage points higher than the benchmark index’s 18.64% in returns. On the flip side, the AQR Large Cap Defensive Style Fund has delivered 16.11% in year to date returns which are 2.53 percentage points lower than the benchmark’s returns. Judging by this, the momentum fund which touts to invest in stocks “considered to have positive momentum if it has performed well in the prior 12 months relative to other stocks in the investment universe” has been the way to go so far in 2024.
Our Methodology
To make our list of the ten best stocks to buy according to Cliff Asness, we ranked all the stocks part of his fund AQR Capital’s Q2 2024 13F SEC filings and picked out the most valuable stakes.
For these stocks, we also mentioned the number of hedge fund investors based on Insider Monkey’s research. 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).
Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders In Q2 2024: 279
AQR Funds’ Latest Investment Stake: $1.729 billion
Microsoft Corporation (NASDAQ:MSFT) is a global leader in personal and cloud computing. It dominates these markets via its Windows operating system, which is the most widely used worldwide, and its Azure cloud business division. After Amazon AWS, Microsoft Corporation (NASDAQ:MSFT) is the second biggest cloud computing company in the world as it commands a 23% market share. This is key for a cloud company, as it enables stable industry partnerships that allow for recurring revenue. Additionally, the scale of Azure, as evidenced by $28.5 billion of Intelligent Cloud revenue means that Microsoft Corporation (NASDAQ:MSFT)’s hypothesis is geared more towards cost control (an internal affair) as opposed to growth (which is dependent on external factors). The firm is also one of the industry leaders in AI through its partnership with OpenAI which has allowed Microsoft Corporation (NASDAQ:MSFT) to provide AI services to its Azure customers. Yet, this also means that moving forward, its ability to generate AI profits is key as the firm has invested billions into the technology.
Microsoft Corporation (NASDAQ:MSFT) chief Satya Nadella is quite optimistic about SaaS, cloud, and AI. Here’s what he shared during the Q4 2024 earnings call:
“So to me, look, at the end of the day, GenAI is just software. So it is really translating into fundamentally growth on what has been our M365 SaaS offering with a newer offering that is the Copilot SaaS offering, which today is on a growth rate that’s faster than any other previous generation of software we launched as a suite in M365. That’s, I think, the best way to describe it. I mean the numbers I think we shared even this quarter are indicative of this, Mark. So if you look at it, we have both the landing of the seats itself quarter-over-quarter that is growing 60%, right? That’s a pretty good healthy sign. The most healthy sign for me is the fact that customers are coming back there. That is the same customers with whom we landed the seats coming back and buying more seats. And then the number of customers with 10,000-plus seats doubled, right? It’s 2x quarter-over-quarter. That, to me, is a healthy SaaS core business. And on top of that, some of the things that Amy shared around Dynamic. That’s another exciting place for us, which is one, we are gaining share. We are – Dynamics with the GenAI built-in is sort of really biz app, it’s probably the category that gets completely transformed with GenAI. Contact centers being a great example. We ourselves are on course to save hundreds of millions of dollars in our own customer support and contact center operations. I think we can drive that value to our customers. And then on the Azure side, you see the numbers very clearly. In fact, I think last quarter is when we started giving you that. You saw an acceleration of that this quarter. One of the other pieces, Mark, is AI doesn’t sit on its own, right? So it’s just for – we have a concept of design wins in Azure. So in fact, 50% of the folks who are using Azure AI are also using a data meter. That’s very exciting to us because the most important thing in Azure is to win workloads in the enterprise. And that is starting to happen. And these are generational things once they get going with you. So that’s, I think, how we think about it at least when I look at what’s happening on our demand side.”
Overall MSFT ranks 3rd on our list. While we acknowledge MSFT’s potential as an AI 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 MSFT 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.
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