Stock Quotes in this Article: ACE, BIDU, GM, TEL, TXN

BALTIMORE (Stockpickr) -- Gutpunch. If there's one word to use to describe this week's market action so far, that's the one. Since Monday, the S&P 500 has shed more than 2%, the biggest two-day slip in stocks in recent memory.

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The catalyst? Why, Congress, of course. As the unresolved issue of the government shutdown progresses the U.S. closer to a theoretical default on the national debt, investors should expect more of the same.

But in spite of all of the drama in Washington, hedge funds are buying with both hands right now.

Even though you might not feel all that bullish this October, the S&P 500 is still up more than 16% on the year. So with funds starting off 2013 underexposed to stocks, it's time to play performance catch up before the end of the quarter. To do that, fund managers are turning to a small set of stocks. Today, we'll take a sneak peek at five names they love.

Here's how: Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

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In total, approximately 3,400 firms file 13F forms each quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing – research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with institutions' $14.6 trillion under management. So far, less than 10% of firms have submitted their 13Fs to the SEC – so that small sample gives us a sneak peek at which stocks institutions favor right now.

Today, we'll focus on five institutional favorites for the third quarter of 2013.

Baidu

It may be a tough year for China, but it's been a stellar year for shareholders in Chinese Web search firm Baidu (BIDU). Shares of "the Chinese Google" have rallied more than 48% since the first trading session of the year, stomping the market's impressive upside here at home. And fund managers keep buying, hiking their stake in BIDU by close to 70% in the latest quarter.

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Baidu is the incumbent Internet search provider in China, boasting around half a million advertising customers and search traffic that puts it in the top five most-trafficked sites in the world. Baidu's business model is effectively the same as Google's, with paid search making up the brunt of its strategy. It's real economic moat comes from the challenges of operating in the challenging Chinese market. With Google's exit from China in 2010, one of the biggest competitors sent a conspicuous message to other Western search providers that doing business in China wasn't worth the trouble, limiting the chances that someone else will take Google's place (and market share).

It doesn't hurt that Baidu is flush with cash right now. Net of debt, BIDU's balance sheet carries around $23.9 million in cash, implying that close to half of the firm's total market capitalization is covered by money in the bank. That's exactly the sort of bargain that hedge funds are chasing right now -- and investors could do worse than following suit this quarter.

Texas Instruments

Texas Instruments (TXN) may be best-known to school kids as the iron-fisted control of the country's market for graphing calculators, but to investors (and engineers), the firm's most important achievement comes from being the world's biggest analog chipmaker. Early filings point to hedge funds boosting their stake in the firm in a big way; funds acquired more than a million shares of TXN in the third quarter, up from 300,000 shares in the prior quarter.

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TXN's analog chip dominance is the lynchpin of its growth strategy right now. Analog chips are used to process analog signals (like the human vocie) and turn them into digital ones. As a result, TXN has a big role supplying components to the fast-paced mobile phone market. The firm has been entrenching itself in the chip business, spending money on next generation manufacturing equipment and acquiring National Semiconductor last year in a deal that dramatically boosted TXN's positioning in the analog chip market.

The chipmaking business is capital intense, a fact that generally means that the costs of replicating chip foundries are very high. Combine Texas Instruments' manufacturing capacity with a cyclical downturn that's just starting to turn higher, and this stock starts to look pretty good. Watch out for earnings on Oct. 21.

TE Connectivity

Another strong performer this year has been TE Connectivity (TEL). Despite being in the middle of a restructuring effort, TEL has still managed to double the broad market's run year-to-date. And hedge funds have been picking up shares as a result; in the last quarter, the early 13F filers increased their stakes in TE Connectivity from just $6 million to $46 million.

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TE Connectivity's core business is making electrical connectors. While that may frankly sound a bit boring, there's no reason why boring companies can't provide investors with very exciting stocks. The ubiquity of electronic connectors in so many applications provides a very attractive market for TEL's products, especially as industrial production continues to recover from the lows watermarks of 2008. TEL's restructuring efforts have been a case of short-term pain in exchange for long-term gain; now this stock is starting to see truly improved operational figures.

TEL has done a stellar job of paying down debt and building up its cash position. Today, the firm sports more than $1.2 billion in cash that offsets relatively small leverage for an industrial manufacturing firm. TE Connectivity's cash generation capabilities should continue to reward investors in the last quarter of the year.

ACE

ACE (ACE) is a commercial property-casual insurer with a pretty simple goal: The firm provides major corporations with insurance against catastrophic losses. That may sound pretty straightforward (all insurers sell themselves the same way, right?), but in fact ACE is positioned in a tight niche with big barriers to entry that smaller rivals can't match. Because ACE has considerable scale, it's able to pursue lucrative less-commoditized deals with bigger customers who can't realistically be insured by a smaller or less-specialized firm.

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To be fair, insurance isn't completely straightforward, as ACE's investors have learned. The catastrophic insurance business can be extremely profitable when times are good, but it can also be treacherous when risks aren't adequately covered. That's an area where ACE has left much to be desired lately. Not only did the firm carry a riskier portfolio during the recession, but it's also been dealing with more insurance losses than its models counted on in the last few years. But as the company rights the ship, it's started to look more attractive as an investment.

Hedge funds agree too. Our small preview group picked up nearly a half million shares in the most recent quarter, quadrupling their bets on ACE since last quarter. Oct. 23 earnings should reveal more details about this stock's improvements in 2013.

General Motors

Last, but certainly not least, is General Motors (GM). Hedge funds added more than three quarters of a million shares of GM to their portfolios in the most recent quarter, hiking their total position in the stock to more than $112 million. Big industry trends bode well for this reborn Detroit automaker right now.

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First of all, the big market cycles make sense to for car companies in 2013. The Fed is bending over backwards to keep interest rates at or near zero, and President Obama's nomination of Janet Yellen for the top Fed job should help keep that accommodative policy intact. Translation: Car loans will remain cheaper than ever before. The stretched-out age of the average U.S. car is another big driver of car sales growth. As consumers look to replace their worn out vehicles, GM should benefit in a big way.

And finally, you can't overstate how much GM itself has changed in the last five years. The firm shed unprofitable brands and significantly improved its build quality, churning out cars that are dramatically more competitive with their Japanese rivals than ever before. As the ex-U.S. market continues to grow, the firm should have ample runway ahead of it for growth.

To see these stocks in action, check out the Q3 2013 Institutional Buys portfolio on Stockpickr.



-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to

TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji