The stocks that professional investors hate the most might just be telling you something this fall.
Too often, investors only pay attention to the stocks that the pros are buying. The thiing is, there's often actually more to learn from what the pros are selling. So today, we're doing just that.
When institutional investors unload stocks en masse, they're sending a big message. After all, admitting to their "sell list" is often an act of contrition for hedge funds -- and even the most disciplined investors don't like spotlighting the names that they're getting creamed on.
Scouring fund managers' hate list is valuable for two important reasons: It includes names you should sell too, and it includes names that could soon present buying opportunities.
Why would you buy a name that pro investors hate?
It's because, often, when investors get emotionally involved with the names in their portfolios, they do the wrong thing. The big performance gap between hedge funds and the S&P 500 index in the last couple of years is proof of that. So that leaves us free to take a more sober look at the names fund managers are capitulating on.
Luckily for us, we can get a glimpse at exactly which stocks top hedge funds' hate lists by looking at 13F statements. 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. Today, we'll take a look at five stocks that are getting the most selling from institutions as a group.
Without further ado, here's a look at five stocks fund managers hate. (Or, you can click here to see my colleague Bruce Kamich's technical analysis of these five names on Real Money, our premium site for active traders.)
Pro investors have a love/hate relationship with Apple (AAPL) - Get Report . The tech giant consistently ranks as one of the most-bought or most-sold stocks in pro investors' portfolios. This quarter, it was all about the selling: Pro investors unloaded 83.1 million shares of Apple from their portfolios during the second quarter of this year. That's a $9.4 billion sell operation at current price levels.
And it's not looking like a particularly prescient one. Since posting surprise sales wins with the recently-launched iPhone 7 and 7 Plus, shares of Apple are up almost 10% year-to-date on a total returns basis.
Apple doesn't need much in the way of introduction. The company's products range from mobile devices (such as the aforementioned iPhone and the iPad) to PCs (the Macintosh) to wearables (Apple Watch) to the world's biggest music store -- and everything in between. That wide array of offerings creates an ecosystem that encourages consumers to "keep it in the family" -- and they have to a large degree.
Fundamentally, Apple remains cheap. Apple's mountain-sized cushion of cash is a major part of that. Even if subjected to hefty penalties to repatriate that cash, it still accounts for nearly a quarter of the firm's current market capitalization. As a result, shares currently trade for an ex-cash P/E ratio of just 9.9.
With Apple's share price finally showing some upward momentum, now looks like a good time to be a buyer again, contrary to what funds may think here.
Apple wasn't alone on hedge funds' list of most hated mega-cap tech stocks; Microsoft (MSFT) - Get Report was another casualty. In fact, the tech sector was the single most-sold sector during the quarter. Funds unloaded 72.5 million shares of Microsoft during the last quarter, a $4.2 billion selling operation at current price levels.
Microsoft is another technology behemoth with a widely diversified product lineup. The firm sells everything from software tools to mobile devices to gaming consoles. Despite that broad collection of offerings, Microsoft's Windows operating system and Office productivity suite still provide the lion's share of the firm's profits today. "The cloud" has become an increasingly important part of Microsoft's business strategy -- and the firm is doubling down on it in 2016. In total, the company's intelligent cloud reporting segment adds up to 25% of overall sales, and is on track to overtake other segments.
While it's not quite as cheap as Apple, Microsoft still looks attractive from a value standpoint. The firm currently carries approximately $130 billion in net cash, giving it a huge asset base that it can leverage to make investments. Cloud offerings aren't likely to get unseated as Microsoft's most important growth engine anytime soon -- and investors will get their next progress update when the firm reports fiscal first-quarter earnings on Oct. 20.
In the meantime, Microsoft still looks like an attractive name to own, even if the hedge funds hate it.
It shouldn't come as a huge shock that funds hate drug maker Allergan (AGN) - Get Report right now. Year-to-date, the $94 billion firm has shed more than 23% of its market value, plummeting as management took on a series of transformational deals that included combining with Actavis and selling its generic drug business to Teva Pharmaceuticals (TEVA) - Get Report for $39 billion in cash and stock. Now, with the dust settled, it's time to give Allergan a closer look.
Allergan owns a deep portfolio of brand-name drugs that's headed by flagship neuromodulator Botox. The firm's focuses in the specialty drug space include women's health, gastrointestinal, eye care and dermatology and aesthetics. While generics have historically been a major piece of the firm's operations, the Teva deal, which closed at the beginning of last month, changes that. As a result, investors should look out for margins to move higher briskly once merger costs are fully absorbed.
Financially, Allergan is in excellent shape. The huge cash influx ($33.4 billion) from Teva gives the company a balance sheet that's practically debt-neutral, giving it the dry powder to engage in more drug pipeline acquisitions in the quarters ahead.
Despite the lousy price action this year, funds might have gotten Allergan wrong after all. Shares have been in a well-defined uptrend since May, and it looks like price momentum is finally turning around here.
Allergan is another holding in Jim Cramer's Action Alerts PLUS charitable portfolio. "All in, we remain confident in Allergan's strategy to target steppingstone deals and believe the management team has identified truly unique assets that will surely benefit from Allergan's massive research team, open science model and relationships with physicians," Cramer and Research Director wrote on Friday.
Delta Air Lines
Despite jet fuel prices hovering near their lows, rocketing demand for air travel and record profits, Delta Air Lines (DAL) - Get Report has failed to see those factors translate into its stock price in 2016. Shares are down 22.6% since the calendar flipped to January of this year, and hedge funds have been unloading their positions. Last quarter, funds sold 28.4 million net shares of Delta, a $1.1 billion sell operation at current price levels.
Delta is one of the biggest airlines in the world, with 809 aircraft in its fleet serving about 250 mainline destinations worldwide. The firm's conscious decision to maintain an older fleet has paid off as lower jet fuel costs have offset higher fuel consumption of the older aircraft. In the meantime, management is taking advantage of the current strength of the airline industry to put in orders for next-gen airliners at bulk discount prices.
In addition to increasing load factors on its aircraft, Delta has been revamping its frequent flyer program of late, finally shifting its rewards structure to incentivize customers who spend the most money with Delta, not necessarily the ones who fly the most miles on Delta's planes.
Still, it's hard to argue with the price action right now. In Delta's case, shares are still stuck in a long-term downtrend; it makes sense to follow hedge funds' lead and avoid being long this stock until that changes.
Last up on our list of hedge funds' most hated stocks is big-box retailer Target (TGT) - Get Report . Target is one of the largest retail operators in the country, with 1,792 locations spread from coast to coast. While competitive advantages are slim in the big retail segment, Target has done a good job historically of courting consumers who head to Target for specific products that rivals don't stock (or can't because they're private labels).
Target has long been at the top of the class in higher-margin private label sales; approximately 20% of sales are Target's own private label products. That sales mix gives Target a distinct margin advantage right now. That said, Target's formerly attractive positioning smack-dab in the middle of the middle-market is no longer the firm's biggest advantage. More recently, it's become a hindrance, as most growth has either moved upmarket or down-market and away from the middle.
There are some silver linings to those dark clouds, however. After correcting more than 20% from its 2015 highs, Target is finally starting to look like a relative bargain again -- but the timing doesn't look great. Shares are still making lower highs in 2016, indicating that shares could fall lower before they find their footing. In short, Target's business is solid, but it's not a spectacular buy this fall.
Hedge funds got the message, selling 25.8 million shares of Target in the most recent quarter. It doesn't make sense to bet against them yet.
Looking for more stock picks? Dan Fitzpatrick of Real Money Pro, TheStreet's subscription-only site for active traders and professional investors, runs down four stocks that are beating the S&P 500. Click here for a free 14-day Real Money Pro trial and check it out.
This article is commentary by an independent contributor. At the time of publication, the author was long AAPL.