As a coattail investor, it pays to follow the stocks that some of the world’s most successful investors love. But what about the stocks they hate?
Retail investors are programmed to focus on buying. More often than not, professional investors don’t suffer from that same bias. Instead, the uncommon wisdom in the money management business reminds us that the key to longevity in these markets isn’t finding big gains; it’s avoiding big losses.
That’s exactly why taking a closer look at the names that hedge fund managers hate can help you escape the stocks that look the least attractive right now. To find them, we’ll break out a new set of 13F filings.
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.
In the second quarter of 2012, 858 hedge funds filed the form with the U.S. Securities and Exchange Commission, and by comparing one quarter’s filing to another, we can see how the group is moving around their $1.2 trillion in equity under management. The results just may surprise you.
Without further ado, here’s a look at five stocks fund managers hate.
It’s official: Hedge fund managers hate Citigroup right now.
In total, the group sold off 53.17 million shares of the big bank, cutting their total positions in the firm by a third, and helping to drop the market value of their holdings in Citi by $3 billion. Bear in mind that Citigroup is a big $100 billion behemoth that’s one of the biggest constituents of stock indices like the S&P 500 index . Hedge funds’ decision to sell off a third of their collective shares is a big deal.
But it’s an understandable one. Even though the big banks have found a much more stable footing in the last few years, Citi and its peers still sport balance sheets that are more like black holes than they are investor valuation tools. Citi has found some solace in the growth of its emerging markets business. The firm’s Indian-born CEO, Vikram Pandit, has been pointing Citi’s lending in developing countries (especially markets in Asia and Latin America), and to good effect. The influx of attractive risk-adjusted returns on a loan book that’s been ravaged by write-offs is nice. But is it nice enough right now?
Ultimately, I’d argue that Citi is probably the second-most attractive of the big banks, after Wells Fargo — but that doesn’t mean you should buy it. The second best pile of dirt is still a pile of dirt.
Hedge funds also hate auto parts supplier Delphi Automotive right now. As a group, the funds sold off 59.54 million shares of the firm in the second quarter, cutting their total holdings in the stock by more than $3 billion — that’s nearly a third of Delphi’s total market capitalization. The progeny of General Motors’ parts business, Delphi is one of the biggest suppliers to the automotive industry, providing car makers with everything from electronic components to powertrain and safety parts (GM is still the firm’s biggest customer).
Investors in the automotive industry have gone on a wild ride over the past few years, Delphi in particular going through a major ordeal from its 2005 bankruptcy filing through the financial crisis that led to the bankruptcy filing of its biggest customer and smashed car orders. But the firm reorganized in 2009 and managed to go public late last year, offering investors a completely different company than Delphi had been just a few years ago. Post-bankruptcy, Delphi cuts a more svelte profile, with a healthy balance sheet and a bottom line that’s actually profitable again.
Major trends in the auto industry could signal big tailwinds for Delphi, especially as components continue to get more complex, and automakers need more outsourced parts from suppliers. Increasing worldwide safety regulation should add to Delphi's top line, especially as higher-margin components (such as back-up cameras) become standard or mandated features.
With car sales continuing to look strong in 2012, hedge funds may have jumped the gun selling Delphi — especially while its earnings multiple remains in the single digits.
JPMorgan Chase is another name on hedge funds’ hate list. I hope you’re getting a theme here: The big banks are persona non grata in hedge funds’ portfolios right now. While JPMorgan didn’t get obliterated from hedge fund holdings the same way that Citi did (“only” around 15 percent of shares got unloaded), funds still sold more than 25 million shares of JPMorgan, cutting the market value of their holdings by $2.5 billion.
In short, JPMorgan suffers from most of the same issues that Citigroup does. Yes, the firm’s financial performance has improved substantially in the last few years, but its balance sheet is still a bit of a minefield, even though management talks about having a “fortress balance sheet” every chance they get. There’s no doubt that CEO Jamie Dimon is good at his job — and he’s a great cheerleader for the industry as well — but the risks inherent in the big banks right now outweigh most of the rewards in my view.
That’s not to say that you need to avoid banks wholesale. A number of regional banking names still look like bargains right now, and several bigger names with hefty fee driven revenue offer the scale of large banking names without the balance sheet scariness.
Bank of Ireland
It may seem surprising that Bank of Ireland is having a great year in 2012. Since the first trading day in January, shares of the $4.5 billion Irish bank have rallied more than 40 percent — but that hasn’t stopped hedge funds from hating this stock. Funds unloaded almost every share of Bank of Ireland they owned in the second quarter, getting rid of close to 294 million shares with around $2 billion.
Of course, it’s easy for a stock to rally 40 percent year-to-date when it’s down a whole lot more than that over the whole year. As part of an Irish banking duopoly, Bank of Ireland has all of the negative implications of being a European bank combined with the more acute problems of Ireland. For that reason, headline risk has become critical in this stock, sending shares bashing against the floor every time rumors of bailouts or insolvency come around.
Until the European debt crisis gets resolved, investors should expect pure-plays like Bank of Ireland to remain volatile. While the name might make for an interesting trade along the way, I’d recommend that most investors take hedge funds’ cues and steer clear.
Last up is Apple, the stock that’s probably the most surprising name to make an appearance on hedge funds’ hate list. But yes, funds sold off shares of Apple en masse in the second quarter, dropping close to 2 million shares from their portfolios. That 2 million shares may not seem like much at first, but remember that Apple is a $700 stock as of yesterday — those 2 million shares have a huge dollar value.
Apple’s selling is surprising because the firm looks so strong right now. In spite of that $700 price tag and a 73 percent rally since the first trading day of 2012, Apple’s valuation metrics are hardly out of whack. Its price-to-earnigs ratio (P/E) currently sits at 16.5, which means that investors are paying a much lower premium for Apple (and its $117 billion in cash and investments) than they're paying for stocks like Google, Texas Instruments, or Qualcomm.
While critics have lampooned the iPhone 5’s apparent lack of new features, the new record sales it’s already earned make those opinions matter a whole lot less. Apple’s massive institutional ownership is probably the biggest catalyst for hedge funds’ selling in the second quarter. With shares up so much, fund managers probably wanted to pare down their concentration in the Cupertino, Calif.-based company.
I still like Apple right now. Investors shouldn’t follow hedge funds’ selling in this name.
—By TheStreet.com Contributor Jonas Elmerraji
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At the time of publication, Jonas Elmerraji had no positions in stocks mentioned.