Some market contrarians will argue that once a stock becomes very popular among investors, it's probably headed for a fall. Among active mutual fund managers, the most overweight stock holdings are, in descending order, Visa Inc. (V), Alibaba Group Holding Ltd. (BABA), Google parent Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT) and Mastercard Inc. (MA), per the latest survey of "crowded trades" by UBS, as reported in Barron's. Their 2019 performance is presented in the table below.

The 5 Most Overweight Stock Picker Positions

(YTD Gains Through April 25, 2019)

  • Visa, +22.3%
  • Alibaba, +37.1%
  • Alphabet, +21.3%
  • Microsoft, +27.7%
  • Mastercard, +29.8%
  • S&P 500 Index, +16.7%

Sources: UBS, as reported by Barron's; Yahoo Finance

Significance for Investors

Heavy buying can send stock valuations soaring. Then, since many fund managers follow a herd mentality, a tidal wave of selling may ensue when these stocks fall from favor, crushing their prices. "Once these trades reach their critical value, or an exogenous shock occurs, we expect a sharp price reversal as investors unwind their exposure in tandem," UBS warned in a 2016 report quoted by Barron's.

After the close on April 24, both Visa and Microsoft reported 1Q 2019 earnings that handily beat analysts' estimates, yet Visa slipped by 0.3% while Microsoft rose by 3.3% on April 25. As noted above, these stocks can fall precipitously if sentiment suddenly turns against them.

UBS also identified the most underweight stock holdings among active managers. These are, again in descending order, Apple Inc. (AAPL), Nestle SA (NSRGY), Exxon Mobil Corp. (XOM), Tencent Holdings Ltd. (TCEHY), and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM). Their year-to-date performance is listed below.

The 5 Most Underweight Stock Picker Holdings

(YTD Gains Through April 25, 2019)

  • Apple, +30.7%
  • Nestle, +20.9%
  • Exxon Mobil, +21.9%
  • Tencent, +23.3%
  • Taiwan Semiconductor, +20.5%
  • S&P 500 Index, +16.7%

Sources: UBS, as reported by Barron's; Yahoo Finance

About 50% of the April surge in the tech-heavy Nasdaq 100 Index has been propelled by just four mega cap tech stocks. These are Apple, Amazon.com Inc. (AMZN), Microsoft, and Facebook Inc. (FB), according to Bloomberg.

Optimists counter that crowded holdings among fund managers reflect high conviction. David Kostin, chief U.S. equity strategist at Goldman Sachs, has voiced this view, per another Bloomberg report. Moreover, according to Goldman Sachs data cited by Bloomberg, the so-called FANG stocks are expected to deliver median profit growth of 15% in 2019, almost triple the figure for the S&P 500 as a whole.

An equal-weighted portfolio of stocks that are simultaneously favored by both mutual fund and hedge fund managers, rebalanced monthly, has beaten the S&P 500 by about 5 percentage points annually since 2013, Bloomberg calculates. Of the overweight stocks listed above, Alphabet is a current favorite of hedge funds and mutual funds alike, per analysis by Goldman Sachs cited by Bloomberg.

Looking Ahead

"When the market reverses, however, you have the equal and opposite reaction as everyone runs for the exits at the same time. That is what occurred in late 2018, and we see no less risk in the market today," Christopher Hillary, CEO and portfolio manager at Denver-based Robaix Capital, told Bloomberg. During the market selloff in the fourth quarter of 2018, it was not unusual to find stocks that had shed 20%, 30%, or more of their value in the process.