There aren't any players with a bigger impact on the market than hedge funds.
Not only are hedge funds thought leaders, employing thousands of forensic analysts to sniff out the best investment opportunities, they are also huge, frequently carrying multibillion-dollar positions that can single-handedly move a market.
That's why hedge funds have gained a cult following, watched closely by investors trying to gain insight into what the biggest players on the Street are up to. A signal that a hedge fund or the entire industry is hot for a new stock can send shares soaring.
And that's exactly what is happening to the most popular stock among hedge funds during the first quarter. This market leader has been on a tear, up 36% on the year after hedge funds poured $1.6 billion into its shares in the first quarter.
I'm talking about Boeing (NYSE: BA), one of the largest aircraft and defense manufacturers in the world. Boeing was the No. 1 stock for hedge funds during the first quarter. Recent 13F filings show that hedge funds poured $1.6 billion into shares in just the first three months of the year.
But if you missed those hedge fund-driven gains, don't worry. As an industry leader, Boeing is in position to cash in on the long-term growth in global air travel and defense spending.
Analysts are expecting a massive boom in global air travel in the next 20 years, with air traffic projected to grow 5% annually. For airliners to meet growing demand for air travel and counter rising fuel prices, Boeing is expecting U.S. and Canadian airliners to invest $700 billion in new aircraft in the next 20 years. As a global leader in aircraft design and technology, Boeing is perfectly positioned to absorb new orders and increase revenue as airlines update their fleets.
Boeing has already made a big move to cash in on the bullish trend expected in air travel in the next 20 years. The company's Dreamliner is considered a game-changer, scoring high in comfort, capacity and fuel efficiency. Although the Dreamliner has been plagued by production delays and a nasty grounding over faulty batteries, Boeing expects the Dreamliner to be a major source of revenue in the years ahead.
In addition to its aircraft division, Boeing is also a leading defense contractor. That sector accounts for about 50% of its annual revenue. Global defense spending remains under pressure from austerity measures and huge fiscal deficits, so Boeing is focusing its defense efforts on high-growth segments of the market such as cybersecurity, intelligence, surveillance and unmanned systems.
These investments could help Boeing evolve with the dynamic defense contractor market, but in the meantime, the company's core defense business still looks strong, with a record backlog totaling $392 billion.
Boeing will also continue to benefit from its strong financial profile. Cash and equivalents of $12 billion will give the company plenty of flexibility to invest in new technology or acquire competitors. With long-term debt of just $8 billion, Boeing has plenty of room to borrow and increase operating leverage.
High barriers to entrance will also work in Boeing's favor. High startup costs and patented technologies make it very difficult for less developed companies to compete with Boeing's size and scale. (These are all reasons why I'd seriously consider giving Boeing the "Forever Stock" label my colleague Elliott Gue uses for picks in his Top 10 Stocks newsletter.)
With plenty of good news in hand, analysts are bullish on Boeing, calling for earnings growth of 26% in 2013 and 14% in 2014. Analysts expect Boeing to grow earnings 10% annually for the next five years.
Risks to Consider: With governments around the world struggling with too much debt and fiscal austerity, total defense spending has slowed in the past few years. Although Boeing is focused on growth segments of the defense market, fiscal austerity poses a threat to defense revenue growth.
Action to Take --> Hedge funds poured $1.6 billion into Boeing in the first quarter, making it the top pick of the group. But in spite of that huge inflow and big gains in 2013, Boeing still looks undervalued, trading with a forward P/E (price-to-earnings) ratio of 15, below its 10-year average of 18. If Boeing returned to its historical valuation, shares could jump 20%. But long-term the shares have even more upside with exposure to growth in global air travel.