Hedge Funds Hate These 5 Stocks -- but Should You?

BALTIMORE ( Stockpickr) -- Even as there's a love-fest heating up between investors and stocks this Valentine's Day, hedge funds still have a hate list. And it's got some big names on it.

When it comes to investing, a rising tide tends to lift all ships. So it's telling when hedge fund managers opt to sink a few of their ships by taking the transaction fees and potential opportunity costs of selling. In short, when equities are broadly moving higher, portfolio managers have to really hate a stock to sell it.

>>5 Stocks Hedge Funds Love -- and So Should You

Too often, investors only focus on what institutional investors like hedge funds are buying; but there's something to be gleaned from both sides of the trade. So instead, we'll focus on five stocks that hedge funds hate today.

And luckily for us, we can get a glimpse at exactly which stocks are on top of 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.

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So far, 239 funds filed the form for last quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around.

Without further ado, here's a look at five stocks fund managers hate.

>>5 Toxic Stocks That Are Poisoning Your Portfolio


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I guess it's not a huge surprise that Apple ( AAPL) tops hedge funds' hate list -- everybody hates this stock right now. Shares of the $439 billion tech behemoth have fallen by around 25% in the last six months, dropping like a rock while the rest of the S&P 500 actually climbed 8%.

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The selling was enough to scare hedge funds away from shares; funds unloaded 1.27 million shares of Apple last quarter, dropping their combined stake in the stock by $1.5 billion.

Apple has been getting a lot of attention -- and rightfully so. As the biggest publicly traded company in the world, Apple's fall is a big deal. But I've said before that this is a case of a stock price that's diverged considerably from this company's value. If Apple were a tenth of its size, it wouldn't be under the same pressures. Now, though, its $439 billion market cap and $467 per share price tag look scary for investors; the bigger they are, the harder they fall, right?

Not quite. Apple's growing market share, impressive diversification, and gargantuan cash cushion impart a fundamental floor on share prices. Management has shown a willingness to at least talk about returning more of Apple's $137 billion in cash to investors, and that's an excellent step in the right direction. In the mean time, investors shouldn't ignore the fact that Apple created more than $41 billion in free cash flows last year. Hedge fund managers are selling this stock on a kneejerk reaction to price -- and they're leaving money on the table.

All of that said, I'd recommend waiting for the technicals to change before jumping into Apple. This stock is still in a downtrend, and as long as more investors keep selling at a kneejerk, you can jump in at a better price.

I also featuredc Apple recently in " Apple Doesn't Suck -- but Its Stock Does."


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Another tech giant that's getting sold off by hedge funds right now is Microsoft ( MSFT). Hedge funds sold 9.15 million shares of the Redmond, Wash.-based software firm in the last quarter. That decreased their collective stake in the stock by more than a quarter -- and around a half billion dollars.

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Microsoft is the firm behind products such as the standard-bearer Windows operating system, the Office suite of productivity tools and a bevy of enterprise applications. Notice that I called Microsoft a software firm; even though MSFT does make hardware like the XBOX and now the Surface tablet, software remains the biggest part of its revenue by far. And the firm's huge installed base means that dominance (and those cash flows) are likely to continue for some time.

Like Apple, Microsoft has a huge cash position. At last count, the firm sported more than $78 billion in cash and investments on its balance sheet, offset by a $12 billion debt load. That's $7.80 per share in net cash, a nice safety net by any measure.

To be clear, MSFT doesn't look like much of a growth stock right now. It operates in a saturated market, and management has been grabbing at straws to find a new niche. But consistent sales, tons of cash and a hefty 3.3% dividend yield make hedge funds' hate of this stock look misplaced.


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2013 is panning out to be a good year for AmerisourceBergen ( ABC). Shares of the pharmaceutical distributor have climbed almost 9% year-to-date, topping even the impressive performance of the S&P over that same period. But hedge funds have missed out on those gains. Funds sold off 7.43 million shares of ABC last quarter, cutting their stake in the firm by 84%. So, was it worth it? In my view, yes.

AmerisourceBergen is one of the biggest pharmaceutical distributors in the U.S., a business that involves acting as a middleman between pharmaceutical manufacturers and healthcare providers. It's a business that provides slim margins -- after all, if profitability grew too attractive pharmaceutical and healthcare firms could just fire the middleman and replicate ABC's offerings internally.

In other words, AmerisourceBergen is attractive because its business isn't.

Even though health care reforms should provide ABC with some tailwinds in the next couple of years, extremely tight competition and an industry ruled by oligarchy make finding an edge difficult. AmerisourceBergen may be the most attractive distributor in the industry, but I'd rather avoid pharma distributors in toto.

Wells Fargo

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Wells Fargo ( WFC), on the other hand, hasn't lost its luster as the best of the big banks -- unless you're a hedge fund. Fund managers offloaded 6.96 million shares of the San Francisco-based bank, cutting their collective stakes in the stock by a quarter-billion dollars.

Wells' biggest advantage right now is that it avoided the big mistakes its peers made heading in to the Great Recession. WFC had the most exposure to retail and commercial banking heading into 2007, and the relative lack of toxic assets on its balance sheet gave it the wherewithal to greatly increase its scale by acquiring Wachovia on the cheap in 2008. Now a bigger, stronger Wells Fargo is well-positioned to ride out this low-rate environment, and start raking it in when the Fed starts to target higher rates down the line.

There are some speed bumps in Wells' strategy, to be sure. As a big bank, the firm's balance sheet is riddled with at least a couple tears. And increased regulation means that management can't make stewardship decisions (like a dividend hike) without asking Uncle Sam first.

Ultimately, everyone has eyes on WFC, and there isn't a big edge in shares right now. That said, relative strength remains stellar in the financial sector, and investors could find worse exposure to financials than this stock. Even if hedge funds are trying to move their money to more exciting opportunities, they mistimed selling WFC.

General Electric

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We round out the hedge fund hate list with another huge blue-chip: General Electric ( GE). Hedge funds sold off 6.99 million shares of the industrial conglomerate last quarter, reducing GE's position in funds' portfolios by $238 million. That's an about-face from where funds stood on this stock just a few months ago; less than a year ago, GE was funds' favorite industrial stock.

Fund managers seem to be content with their 19% gains, at least on those 6.99 million shares.

GE is involved in a bevy of heavy manufacturing segments, from making jet engines to wind turbines and medical equipment. While those units seem unsuited to work together at fist, the firm is able make the puzzle pieces fit together and share technologies and customers across business lines. The wind turbine business, for instance, can benefit from the advances that the firm is making in the jet engine business -- and the firm can make money by financing all of those customers through GE Capital.

With a solid 3.4% dividend yield and the financial stability you'd expect from a stalwart industrial blue chip, GE still looks like a good option for stock investors, even if hedge funds disagree. With the S&P clawing its way higher in 2013, this stock should go along for the ride.

To see these stocks in action, check out the at Stocks Fund Managers Hate Q4 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.