BALTIMORE (Stockpickr) -- If you go to any number of investment conferences around the world, you'll find no shortage of professional fund managers talking their book. The fact is that professional investors are only too happy to talk about the stocks they've been buying -- but they rarely pipe up about the names they're selling.
That's not surprising. For hedge fund managers, revealing the "sell list" is an act of contrition. Even disciplined investors don't like admitting spotlighting the names they're getting creamed on.
And consumer discretionary stocks are a perfect example of that. No other sector got sold off as hard as consumer discretionary stocks did in the first quarter of 2014. And that's giving us some crucial data to look at as summer fast approaches.
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 represents 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? 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. So far, 1,798 hedge funds filed the form for the most recent quarter, so by comparing one period's filing with another, we can get a sneak peek at how early filers are moving their portfolios around.
Without further ado, here's a look at five stocks fund managers hate.
Not long ago, Amazon.com (AMZN) was the name that could do no wrong. No profits? No problem! But that's changed pretty abruptly in 2014, as razor-thin margins suddenly became less tolerable for investors in the world's biggest online retailer. Year-to-date, AMZN is down more than 23% -- and funds have been selling shares all the way down. In the first quarter, funds sold 1.29 million shares of Amazon, unloading a nearly $400 million stake at current price levels.
That's enough to make Amazon the most-sold name on our institutional selling preview.
Amazon is the largest online retailer, moving $74.5 billion worth of merchandise last year. The firm's reach goes beyond traditional e-commerce, however; AMZN also owns a growing streaming service and a device ecosystem through its Kindle e-readers and tablets. Amazon is additionally one of the largest cloud computing names through its Amazon Web Services unit.
For years, Amazon has sacrificed margins for growth, commoditizing countless products and selling Kindles at or below cost to drive consumption of digital media. The idea is that AMZN can suddenly flip a switch and ramp up margins -- but the question of whether customers will remain sticky is less clear. For now, AMZN has lost its momentum but it retains a very lofty valuation. It makes sense to join the sellers in Amazon this summer.
Coffee shop giant Starbucks (SBUX) hasn't done much but give up 2013's gains ever since the calendar flipped to January. And so investors have been selling into the weakness: funds unloaded 4.83 million shares of SBUX last quarter, selling off a $343 million bet on the firm at today's share prices.
Starbucks is a $53 billion coffee company that runs a worldwide chain of more than 20,000 company-owned and licensed stores, as well as a packaged coffee products business whose products can be found on grocery shelves. The firm is largely responsible for creating a market for $5 cups of coffee, a lucrative business that's created more than a few competitors in the space. And that, in turn, has helped to fuel a strong growth story despite SBUX's current size.
Like Amazon, Starbucks currently sports a hefty valuation. While balance sheet leverage is still minimal, the firm's debt load has been growing in the past few quarters. Likewise, serious challenges in the packaged coffee space from the likes of Keurig Green Mountain (GMCR) is threatening to unseat SBUX in its home turf; the firm's own entree into the single-serve coffee market has failed to gain the traction that investors hope for.
Low moats, significant competition and a big price tag make SBUX a less than invigorating name to own in 2014.
Electronics retailer Best Buy (BBY) has gone from a punch line to a turnaround story in the last year and change. After struggling through declining sales, management scandals, and economic turmoil, Best Buy is regaining profitability again thanks to its "Renew Blue" turnaround initiative. But it hasn't been enough to attract hedge funds in 2014: portfolio managers unloaded 10.66 million shares in the first quarter of this year. That amounts to more than 20% of institutional investors' holdings in BBY.
Best Buy may have great reach with its huge footprint of nearly 2,000 stores across the world, but encroachment from the likes of Amazon.com has meant that many Best Buy locations have become physical showrooms for BBY's better-priced rivals. The restructuring plan has helped to trim substantial costs and make BBY dramatically more competitive in 2014, but none of that changes the fact that Best Buy's business is being fundamentally challenged.
On the upside, investors don't have to pay much for the business today. Shares trade at just 13 times earnings -- a tiny multiple for such a low-margin business. If BBY can squeeze just a few more basis points out of its margins, shares could move materially.
Ultimately, it's hard to call BBY a conviction buy at today's levels. Until the firm can give consumers a compelling reason to spend money inside BBY stores, this name is going to continue to trade at a discount.
Discount apparel and housewares retailer TJX (TJX) is a different story. Not only does this firm sport a very compelling traffic driver for its stores, TJX also benefits from outsized margins from the retail sector. So while fund managers sell shares of TJX Companies in 2014, it makes sense to be on the other side of the trade.
TJX owns an attractive collection of discount retail names that includes T.J. Maxx, Marshall's and HomeGoods -- three store chains that benefit when consumers want to seek out a bargain. TJX is the standard bearer in the off-price retail segment, the firm's stores stock major brand name clothing, accessories and housewares at prices that are fairly dramatic discounts to their retail costs. That positioning helps to ensure limited competition from online discount retailers; the limited stock nature of the off-price retail business makes online sales difficult. Better, full-price retailers and manufacturers need TJX because the firm is willing to buy massive swaths of excess inventory.
Retail is extremely capital intense, and TJX provides a top-line boost to its suppliers with zero risk. On the consumer side, TJX's value proposition means that the firm stands to do well in the event of a surprise economic hiccup. Even so, funds sold off 6.87 million shares of TJX in the most recent quarter.
Last up is luxury handbag maker Coach (COH). Not long ago, Coach was a bloated name that was still sitting high on the last vestiges of its huge success in 2008. While other higher-end accessory brands were reeling from the spending cuts of the Great Recession, Coach took the calculated risk of offering lower-priced luxury goods to "mass affluent" consumers. That strategy paid off in spades as COH managed to attract more customers without diluting its storied brand.
Coach makes and retails handbags and other accessories (such as wallets and umbrellas) through a network of around 543 North American stores and a large presence online and in third party channels like department stores. In the last few years, overseas has been the big story -- and newer stores in markets such as China and Japan have warranted a hefty growth premium in the stock's price.
But that premium is all but evaporated now. COH currently trades for just 12.9 times trailing earnings, a price tag that puts a fat 3.2% dividend yield on shares at current levels. That's a big income check for a stock that's already delivering hefty internal growth rates.
While funds sold 3.22 million shares of the handbag maker, it looks buyable here now that a big correction has taken hold.
To see these stocks in action, check out the Institutional Sells portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.