John Dorfman: Hedge-fund favorites rose 23% in past year

A bright young intern just left my firm to work for a New York hedge fund.

That was bad news for me, but not unusual in the financial world. Hedge funds are magnets for talent, partly because in good years they can pay handsome bonus checks.

Gurufocus.com maintains a screen of stocks popular with hedge funds. A year ago, I selected five of these stocks to recommend. They have risen 23.6%, leaving the Standard & Poor’s 500 Total Return Index in the dust at 15.3%.

Frankly 15.3% is a fine year. But 23.6% is better, so let’s play this game again. Here are five hedge fund favorites that appeal to me now.

Taiwan Semiconductor

Every major semiconductor company that I know of, with the exception of Intel Corp. (INTC), uses Taiwan Semiconductor Manufacturing Co. (TSM) to make its chips. TSM has expertise, precision and economies of scale.

It also has a net profit margin of 42%, astoundingly high. Yet because Taiwan lives under a sword of Damocles — the threat of Chinese invasion — the stock is not horribly expensive.

It sells for 30 times recent earnings, and 26 times the earnings analysts expect in 2026. Al Gore, vice president under President Bill Clinton, is one of many investment managers who own it. He is the co-founder of Generation Investment Management, based in London.

Berkshire Hathaway

Warren Buffett, the legendary CEO of Berkshire Hathaway Inc. (BRK.B), once described hedge funds as a compensation scheme disguised as an asset class. That hasn’t stopped hedge funds from investing in Berkshire.

Buffett will step down as chief executive at the end of this year. But I think highly of the team that will succeed him, beginning with Greg Abel as the next CEO.

Berkshire’s debt-to-equity ratio is a nice low 19%. If the U.S. economy happens to get into trouble, Berkshire could rescue other companies on favorable terms, as it did in the past with Bank of America, Goldman Sachs and General Electric.

Walmart

I’m on record as having predicted that the U.S. will be in recession by May. Could I be wrong? Sure. But I see auto loan defaults rising, along with credit-card delinquencies. I see hiring petering out. And I think tariffs and deportations are counterproductive for the economy.

One firm that usually holds up well during economic downturns is Walmart Inc. (WMT). It is famous for its low prices. During recessions it can hold onto most of its previous customers, and get new ones who are trading down.

Regrettably, at $107 a share, the stock’s valuation ratios are high. I would nibble if it falls below $100 and buy with enthusiasm at $90.

JPMorgan Chase

JP Morgan Chase & Co. (JPM) chairman Jamie Dimon remarked this month that soured bank loans are like “cockroaches.” You rarely see just one. JPMorgan Chase has been pretty successful in avoiding bad loans, although it did suffer some notoriety from its relationship with sex offender Jeffrey Epstein.

One thing I look for in a bank stock is a return on assets of 1% or more. JPMorgan Chase has done that in six of the past seven years, and seems certain to do so again this year.

If the Federal Reserve cuts short-term interest rates, but rates on longer-term loans such as mortgages stay close to where they are now, it would be a Goldilocks scenario for JPMorgan.

Caterpillar

Caterpillar Inc. (CAT), which makes bulldozers and other construction equipment, is looking at good news and bad news. The good news is the dollar is weak, which helps the company export. More than half its sales usually come from outside the U.S.

The bad news is the Trump administration is slapping a lot of tariffs on imports, inviting retaliation. My guess is the dollar effects will outweigh the tariff effects.

Performance

The good performance of the hedge-fund favorites I recommended a year ago was sparked by H&E Equipment Services Inc., which sold itself to Herc Holdings Inc. (HRI) in June at a 68% gain.

Customers Bancorp. Inc. (CUBI) also did well, returning 29%. On the flip side, D.R. Horton Inc. (DHI) stumbled to a 14% loss as homebuilding languished. In between those extremes, Loews Corp. (L) achieved a 22% return, and Toyota Motor Corp. (TM) notched 13%.

Figures are total returns including dividends, from Oct. 28, 2024, through Oct. 16, 2025.

Note that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: Personally, and for most of my clients, I own Taiwan Semiconductor, Berkshire Hathaway and JPMorgan Chase.