PayPal and 4 Other Stocks Hedge Funds Loved in the Third Quarter

Market volatility in the third quarter took a toll on even the largest hedge fund investors, but here are five stocks they bought into during the period.
By Laurie Kulikowski ,

Market volatility in the third quarter took a toll on even the largest hedge fund investors.

The top 10 hedge funds had aggregated equity holdings of $191 billion for the September-ending quarter, down from $200 billion in the second quarter, according to S&P Capital IQ, a division of McGraw Hill Financial, in its quarterly hedge fund tracker. The report analyzed Securities and Exchange Commission 13-F filings by the 10 largest hedge funds by asset size to spotlight big buying and selling trends.

The decline in holdings reflected decreased value of hedge funds current positions as well as an overall decline in equity positions to 441 stocks from 471 stocks in the prior quarter, S&P Capital IQ's report said.

That said, hedge funds were active in the consumer staples sector as these stocks then to be non-cyclical. The top 10 largest hedge funds purchased a combined $3.7 billion in sector positions last quarter.

Two stocks with the largest new positions in the third quarter by large hedge funds were Teva Pharmaceuticals (TEVA) - Get Report and the newly-spun off PayPal (PYPL) - Get Report . Hedge funds bought a combined $1.9 billion in Teva, while Carl Icahn's Icahn Capital bought a new $1.6 billion position in PayPal.

In comparison, the largest hedge funds sold the most positions in the information technology sector, with a total sell off of $1.4 billion in the third quarter. It was the third consecutive quarter that information technology stocks led hedge fund selling, the note said. Notably, eBay (EBAY) - Get Report was the most sold stock of the quarter.

Check out the five stocks with the biggest investment by hedge fund managers in the third quarter. TheStreet highlights notable new or added positions on each of the five stocks, pairing the companies with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

RYCEY

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5. Rolls-Royce Holdings (RYCEY)
Market Cap: $15 billion
Year-to-date return: -38%
Who Bought?: ValueAct Capital

ValueAct Capital owns more than 10% stake in Rolls-Royce, after steadily increasing its stake over the summer. ValueAct purchased 100 million shares last quarter, according to S&P Capital IQ.

TheStreet Said: no rating available

PYPL

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4. PayPal (PYPL) - Get Report
Market Cap: $44 billion
Return since July when it split from eBay: -10.4%
Who Bought?: Icahn Capital, Highfields Capital

Carl Icahn took a new position in the newly formed company, purchasing 46.3 million shares. His stake is currently worth $1.7 billion. Highfields Capital also purchased stock, buying 4.6 million shares, currently worth $165.1 million, according to Bloomberg.

TheStreet Said: no rating available yet

MDLZ

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3. Mondelez International (MDLZ) - Get Report
Market Cap: $70.5 billion
Year to date Return: 13.9%
Who Bought?: Pershing Square Capital

Bill Ackman of Pershing Square Capital took a new position in the Kraft spin off, purchasing 43.4 million shares. His stake is worth $1.9 billion, according to Bloomberg.

TheStreet Said: TheStreet Ratings team rates MONDELEZ INTERNATIONAL INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

We rate MONDELEZ INTERNATIONAL INC (MDLZ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, compelling growth in net income, notable return on equity, attractive valuation levels and expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period. Although other factors naturally played a role, the company's strong earnings growth was key. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Food Products industry. The net income increased by 708.2% when compared to the same quarter one year prior, rising from $899.00 million to $7,266.00 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Food Products industry and the overall market, MONDELEZ INTERNATIONAL INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • 41.47% is the gross profit margin for MONDELEZ INTERNATIONAL INC which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 106.08% significantly outperformed against the industry average.
  • You can view the full analysis from the report here: MDLZ

TEVA

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2. Teva Pharmaceuticals (TEVA) - Get Report
Market Cap: $60 billion
Year to date Return: 7.5%
Who Bought?: Paulson & Co., Viking Global, Highfields Capital, Glenview Capital

Of the 30 million shares bought by large hedge funds last quarter, Paulson & Co. bought the majority, adding 16 million shares to the 2 million he already owned. Paulson's stake is currently worth $1.1 billion, according to Bloomberg.

Viking Capital bought a new position in the stock of 8.9 million shares, worth $550 million. Highfields Capital added 3.8 million shares to own 8.3 million worth $514 million, while Glenview Capital bought an additional 1.3 million shares in Teva Pharmaceuticals to hold 4.2 million shares at quarter's end. It stake is worth $260 million. 

TheStreet Said: TheStreet Ratings team rates TEVA PHARMACEUTICALS as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

We rate TEVA PHARMACEUTICALS (TEVA) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for TEVA PHARMACEUTICALS is rather high; currently it is at 63.84%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, TEVA's net profit margin of 2.13% significantly trails the industry average.
  • The current debt-to-equity ratio, 0.51, is low and is below the industry average, implying that there has been successful management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.48 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • TEVA PHARMACEUTICALS has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TEVA PHARMACEUTICALS increased its bottom line by earning $3.56 versus $1.50 in the prior year. This year, the market expects an improvement in earnings ($5.43 versus $3.56).
  • TEVA, with its decline in revenue, slightly underperformed the industry average of 3.7%. Since the same quarter one year prior, revenues slightly dropped by 4.6%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • After a year of stock price fluctuations, the net result is that TEVA's price has not changed very much. Although its weak earnings growth may have played a role in this flat result, don't lose sight of the fact that the performance of the overall market, as measured by the S&P 500 Index, was essentially similar. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.
  • You can view the full analysis from the report here: TEVA

AMZN

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1. Amazon.com (AMZN) - Get Report
Market Cap: $311 billion
Year to date Return: 114%
Who Bought?: Lone Pine Capital, Viking Global, Tiger Global

Lone Pine Capital took a new position in the e-commerce player, purchasing 1.9 million shares worth $1.3 billion, according to Bloomberg. Viking Global added 735,000 shares, for a position totaling 3 million shares worth $2 billion, while Tiger Global added 2.1 million shares, with a total position of 3.2 million, or $2.1 billion. Viking and Tiger Global each added new positions of the stock in the second quarter.

TheStreet Said: TheStreet Ratings team rates AMAZON.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, robust revenue growth and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the company's return on equity has been disappointing.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Internet & Catalog Retail industry average. The net income increased by 118.1% when compared to the same quarter one year prior, rising from -$437.00 million to $79.00 million.
  • AMZN's revenue growth trails the industry average of 38.2%. Since the same quarter one year prior, revenues rose by 23.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • AMAZON.COM INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, AMAZON.COM INC swung to a loss, reporting -$0.54 versus $0.58 in the prior year. This year, the market expects an improvement in earnings ($1.92 versus -$0.54).
  • Powered by its strong earnings growth of 117.89% and other important driving factors, this stock has surged by 113.66% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, however, we cannot assume that the stock's past performance is going to drive future results. Quite to the contrary, its sharp appreciation over the last year is one of the factors that should prompt investors to seek better opportunities elsewhere.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Internet & Catalog Retail industry and the overall market on the basis of return on equity, AMAZON.COM INC underperformed against that of the industry average and is significantly less than that of the S&P 500.
  • You can view the full analysis from the report here: AMZN
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