BALTIMORE (Stockpickr) -- What's the "smart money" buying in 2014? Who cares! The stocks that fund managers are selling this year can tell you a whole lot more.
Investors love knowing what the pros are buying -- that's only natural. But it's the sell list -- the names that institutional investors hate the most -- that represent some of the biggest conviction moves. 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 year 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. All told, 3,738 hedge funds filed the form for the most recent quarter, so by comparing one periods filing to another, we can get a sneak peek at how early filers are moving their portfolios around.
Without further ado, heres a look at five stocks fund managers hate.
First up on portfolio managers' chopping blocks is Cisco Systems (CSCO) -- and it's not really hard to see why. Cisco has been a performance drag for the past year, slipping 1.35% in the last 12 months. The S&P 500 has climbed 20% over that same period.
So fund managers put CSCO at the top of their hate lists, unloading 104.7 million shares from their portfolios. That's almost $2.3 billion worth of shares at current price levels.
Cisco Systems is the world's biggest supplier of the equipment and software used to connect networks. With more and more consumers using services in the "cloud" these days, there are some major tailwinds in the IP networking business in 2014. But they haven't spared Cisco from selling. This firm's massive scale and big competition makes growth challenging and customer attrition a lot easier. But Cisco claims top dog status in the industry for a reason: Since Cisco's gear is designed to plug-and-play with other Cisco components, IT departments that buy Cisco products can often see much lower integration and ongoing technical support costs. That gives Cisco an important economic moat right now, even if competition is trying to move in on its business.
Financially, Cisco is well-positioned. The firm carries $31 billion in net cash, a cushion that amounts to approximately $6 per share. That's a huge risk-reducer for investors right now, and management is returning it to shareholders in the form of a 3.5% dividend yield and a series of big share buybacks. In short, Cisco operates an attractive business at a cheap valuation. That's why patient investors might want to give CSCO a second look in 2014.
Hedge fund managers hate Perrigo (PRGO) right now. Portfolio managers unloaded 38.45 million shares of the over-the-counter drug manufacturer last quarter, essentially halving their stakes in the firm. That's a big conviction bet against PRGO. Now the question is whether they're right.
Even if you're not familiar with the Perrigo name, there's a good chance you're familiar with its products; the firm is the country's largest maker of private label OTC pharmaceuticals and infant formula. So while Perrigo's products are hard to miss (around 70% of OTC drugs in the U.S. are made by PRGO), they just happen to carry store brand labels. As retailers battle margin squeezes caused by external factors, boosting private label exposure is one of the few ways for stores to get those margins back. That makes Perrigo's relatively high-margin offerings an easy sell.
Perrigo only earns around 20% of its sales internationally, a fact that leaves a lot of open runway for the firm -- especially in developed countries, where regulatory hurdles create barriers to entry. For instance, PRGO's standing as the only FDA-approved private label infant formula manufacturer makes it easier for the firm to gain approval in other countries with stringent health licensing. Despite the upside, PRGO's valuation looks rich right now -- I wouldn't pay that big premium to pick up fund managers' unwanted shares.
The last year has been rough for shares of Newmont Mining (NEM) -- the $13 billion gold miner has seen shares drop more than 36% in those trailing 12 months. That's more than double the pain investors in spot gold have felt, and it's why pro investors who bought Newmont for its exposure to the yellow metal have been selling en masse. Last quarter, fund managers sold off 15.16 million shares of the mining stock, after their positions lost $2.25 billion in value.
As far as gold miners go, Newmont is near the top of the pack. The firm is one of the largest gold producers in the world, with more than 5 million ounces of gold and another 144 million pounds of copper pulled out of the ground last year. But cost battles and declining gold yields at NEM's mines have squeezed the firm pushing two of the last four quarters to big losses. Ultimately, you can't escape commodity risk when you buy a mining stock -- they're basically a leveraged bet on the metal. That's why recent drops in gold prices have pushed Newmont's profitability underwater.
Newmont is getting back to basics, though, after a long stretch of runaway gold prices reversed. The firm is paying back debt, and working to reduce the cost of each ounce it pulls out of the ground. If you're looking for gold exposure, then NEM's beaten-down status does provide a bargain right now. Then again, that's a big "if" in 2014.
Athletic apparel maker Lululemon (LULU) has seen shares get a similar beat-down in the last year. LULU is off more than 28% since this time in 2013, and professional investors have been selling hard. Funds unloaded 3.5 million shares of LULU last quarter, after their stakes in the $7 billion firm dropped by $1.9 billion.
Lululemon was first-to-market in the yoga apparel niche, and it's been riding that good timing to profitability for the last several years. Lululemon took advantage of that fortuitous timing to expand its offerings to include other fitness gear as well as menswear. Today, the Vancouver-based firm also boasts 250 retail stores spread across the U.S., Canada, Australia and New Zealand.
Financially, LULU is in great shape, with more than $600 million in cash on its balance sheet and zero debt. That cash position has been swelling in recent quarters, buoyed by net profit margins near 20%. And after selling off for the last year, LULU's P/E ratio comes in at 25.6. That's a bargain multiple for a stock that grew revenues by 37% last year. The fundamentals may look good, but the technicals look horrific in LULU, and I wouldn't be a buyer until it breaks that downtrend in shares.
LULU is close to righting itself technically, but it's not there yet.
Last up on fund managers' hate list is $21 billion data storage stock NetApp (NTAP). Funds sold off more than 27 million shares of NetApp in the last quarter, a conviction sell that adds up to more than 8% of NTAP's outstanding shares. That huge exodus of institutional investors has put a lot of downward pressure on shares in recent months; the question is whether they're right.
NetApp's main business is data storage equipment, a space that's been growing at a breakneck pace as greater demands for cloud services expand storage and back-up requirements. Because NetApp's network-attached storage devices can be purchased ad hoc (rather than as part as a major data center overhaul), it's an ideal vendor for firms whose storage needs are gradually increasing (and those who don't want to shell out massive capital for all-new IT infrastructure).
Growth opportunities aside, the real story in NTAP is cash. With more than $4 billion in net cash sitting on its balance sheet, NetApp has enough dry powder to pay for approximately 30% of its market cap at current price levels. Adjusting for cash, NTAP trades for just 13 times earnings right now, a bargain bin valuation. While revenue increases are likely to slow down in the years ahead as NetApp's business matures, institutional investors were premature in unloading shares of this cheap computer storage stock.
To see these stocks in action, check out the Institutional Sells portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.