Sneak Peek: The Pros Hate These 5 Stocks -- Should You?

BALTIMORE ( Stockpickr) -- Want to know what the "smart money" is thinking before your next trade? Just take a closer look at the stocks they hate.

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Professional money managers have been earning some deserved criticism in 2013. While this year has been a blockbuster year for stocks, fund managers weren't convinced at the beginning of the year -- and far too many jumped back out of stocks after the temporary dip in the middle of the summer. That means that most funds are missing their benchmarks right now.

And with year-end just two and a half months away, they're reaching for performance in the final quarter of the year.

In my view, that means that a lot of the names they're throwing away are quality that they know won't close the gap on the market. But with hundreds of billions of dollars coming out of quality to chase higher-risk stocks this quarter, it could mean that there are some bargains in the names the pros hate.

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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. So far, just 130 funds filed the form for the most recent quarter, so by comparing one period's filing to another, we can get a sneak peek at how early filers are moving their portfolios around.

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


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Professionals really hate Qualcomm ( QCOM) right now. As a group, they've halved their holdings in QCOM, unloading more than 7.6 million shares of the $117 billion wireless technology stock. And it shows in Qualcomm's stock price: Shares are off by nearly 4% since their September highs, vs. a modest gain in the S&P 500 over that same period.

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Qualcomm is best-known as a chipmaker for mobile devices, producing everything from processors to wireless communications cards. But too many investors forget that it's also a major a major technology IP licensor. The firm's patents effectively mean that every handset maker in the world has to pay Qualcomm royalties if they want their phones to operate on 3G and 4G networks. With replacement rates still very high for mobile phone owners, that combination of selling chips and licensing technology provides a great way to play the trend -- and it's not showing any signs of slowing.

Mobile chips are still the biggest part of QCOM's revenues; the firm's Snapdragon processor is finding popularity among high-end smartphones, and it provides the baseband chips in Apple's ( AAPL) iPhones and iPads. Meanwhile, nearly $30 billion in cash and investments (and no debt) takes a lot of the risk off a P/E ratio that's already in the teens.

The pros may hate QCOM, but investors might want to consider showing this stock some love before the end of the year.


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Microsoft ( MSFT) is another tech name that fund managers hate this quarter. Granted, they don't hate MSFT quite as much as they hate Qualcomm, but our small sample of pros hated it enough to unload more than 9 million shares last quarter. That's more than 20% of their entire stake in the Redmond, Wash.-based tech giant.

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Microsoft is a firm in transition right now. Long-time CEO Steve Ballmer is on his way out, and a contingent of big-money investors has their eyes on Bill Gates next. Changing out one or two truly critical execs could pan out one of two ways for Microsoft: it could be a breath of fresh air for a firm that's struggled to come up with fresh ideas, or it could be an absolute catastrophe. Luckily, MSFT has a lot of downside protection in its goldmine software franchises.

Today, more than 80% of Microsoft's revenues come from Windows (in both regular and server form) and the Office productivity suite. These are sticky businesses with relatively high switching costs, so MSFT has a nice cushion to give itself the freedom to fail as it looks for the "next big thing" for its business. Better still, a full quarter of this stock's market capitalization is paid for in cold hard cash.

MSFT may not be the hottest company in the tech sector right now, but it's cheap and it throws off cash.

Home Depot

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3.6 million - that's how many shares of Home Depot ( HD) early-filing fund managers unloaded in the most recent quarter, once again cutting their stakes in this stock by half. That's in spite of the 22% rally that this home improvement retailer has eked out for investors since the calendar flipped over to January.

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With more than 2,250 stores across the globe, Home Depot weighs in as the largest home improvement store chain in the world. The firm's customers include retail consumers as well as wholesale construction buyers, positioning that's given HD a more direct route to housing spending than smaller hardware competitors. And while investors have backed off of Home Depot's shares following fears of weakness in the housing sector, 2008 already taught us that home improvement names fare better than expected when housing goes soft.

2008 also showed that Home Depot was ready and willing to fix itself from within. The firm levered up as the housing bubble expanded, leaving itself with too many stores that weren't doing enough; it didn't have a sales problem -- it had a saturation problem.

But with the problem corrected by a restructuring process on the other end of the Great Recession, the Band-Aid has already been pulled off. This stock might warrant a second look now that the pros are done with it.

Express Scripts

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As the world's largest pharmacy benefit manager, Express Scripts ( ESRX) is basically the middleman between drug companies and pharmacies, administering more than a billion prescriptions each year. With the introduction of "Obamacare," there's been some concern that firms like ESRX could get squeezed out -- and professional investors have squeezed shares out of their portfolio too. The early filers unloaded around half of their total positions in Express Scripts in the most recent quarter, selling off 4.63 million shares.

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But that argument doesn't hold water for one simple reason: If it were truly that easy to get rid of pharmacy benefit managers, big pharma or pharmacies would have squeezed them out a long time ago. Instead, Express Scripts benefits from economies of scale -- it focuses on controlling costs by administering drug benefits, and taking a small margin for its trouble. ESRX gets paid by doing its job better than a non-specialist could.

The margins in the pharmacy benefit management business are indeed paper thin, but the aging baby boomer demographic in the U.S. could help to make those thin margins on a bigger base of revenues. In the near-term all of the contrary sentiment in ESRX could provide a solid buying opportunity this quarter.


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I'm inclined to agree with the institutional investors on Verizon ( VZ). Fund managers sold off around a third of their Verizon holdings last quarter, a number that adds up to around 4.13 million shares for our small group. The reason? The firm just destroyed a ton of shareholder value.

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Verizon owns the biggest fixed-line network in the country, including the fastest direct-to-home service out there in FiOS. But for years, the firm's cash cow has been its Verizon Wireless unit. The problem, though, has been that VZ only owned around half of its wireless arm -- the other half was owned by Vodafone ( VOD). So for years, Verizon management has hinted at their interest in buying back the rest of the mobile business. While they finally got the chance this year, they overpaid dramatically for the privilege, destroying shareholder value in the process.

There's no question that Verizon's numbers will improve now that the deal is done. Bigger profits from Verizon Wireless will now have almost double the impact they once did - but the cost doesn't justify the benefits. To be clear, Verizon isn't super-expensive right now, but rival AT&T ( T) looks a lot more attractive by comparison.

To see these stocks in action, check out the at Stocks Fund Managers Hate Q3 portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.


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At the time of publication, author was long AAPL.

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 Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji