BALTIMORE (Stockpickr) -- There's nothing hedge fund managers love more than talking their books Professional investors relish every opportunity to go on TV or speak at a conference to tell you what they're investing in (and why you're making a mistake by not doing the same). That's part of the reason why retail investors get fixated on the stocks that fund managers are buying.
But finding out which stocks fund managers are selling can often be even more useful for investors.
For starters, admitting to their "sell list" is usually an act of contrition for hedge funds; even the most disciplined investors don't like admitting spotlighting the names they're getting creamed on. Sure, 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.
That's why, today, we're taking a closer look at five stocks that topped hedge funds' sell lists in the last quarter.
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 and change 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, 495 hedge 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.
Without further ado, here's a look at five stocks fund managers hate.
International Business Machines
There's no single stock that funds hated more last quarter than $200 billion tech behemoth International Business Machines (IBM). All told, early-filing investment funds sold off 2.56 million shares of IBM in the last three months, shedding more than 15% of their holdings in the firm. Now the question is whether it makes sense to join them in the selloff.
IBM is one of the largest names in the technology sector and a perfect example of the prototypical blue-chip stock. The firm's diverse spectrum of IT offerings includes hardware, software and services in more than 170 countries. As enterprise IT spending continues to enjoy some economic tailwinds, IBM is sitting on the right side of a significant trend. One of IBM's most important businesses is mainframes, which continue to be critical in processor-intense industries like finance, communications and research. Because barriers to entry are high in the mainframe business, IBM remains one of a handful of firm's that's qualified to build, sell and service them.
It's important to note that IBM has shown a willingness to make significant changes to its business when necessary. A perfect example of that was the sale of its consumer PC business back in 2005. Other computer companies have made similar moves as the PC market became increasingly commoditized, but IBM was first to the punch. Because of its entrenched nature, IBM's business isn't going anywhere anytime soon. But that's also one of it's biggest problems: The firm's business is so big that it's proven difficult to move the needle in recent years.
Investors searching for growth should look elsewhere, but investors looking for a consistent dividend and a cheap earnings multiple could do worse than IBM.
Bank of America
Last quarter, no single sector got sold off by hedge funds as hard as the financial sector. And no financial stock got sold off as hard as Bank of America (BAC). So far, hedge funds have unloaded 18.81 million shares of the big bank, a greater than 20% reduction in those funds' overall BAC holdings. That makes BAC a perfect example of a conviction sell.
Bank of America tips the scales as one of the biggest financial institutions in the world. The problem is, it's the worst of the big banks. The firm arguably made the worst acquisitions in the wake of 2008's financial crisis, enduring a continuing barrage of problems from its Countrywide buy. But as the fees and judgments taper off, BofA could be close to turning a new leaf. The new firm boasts a lower cost structure, an absolutely massive deposit base and (importantly) ample regulatory scrutiny. Those three factors should help close the glaring gap between BofA's returns and those of its peers.
Make no mistake, as of this this moment Bank of America is still the worst of the big banks. Thanks to Fed rules over dividend payouts, dividend yields have become a quick and dirty barometer for financial health -- and BAC's 0.26% yield is indicative of the firm's shortcomings. An emphasis on deposit-building and fee-based businesses like wealth management and credit cards should help correct that, but there's no shortage of better options in the banking industry right now.
It makes sense to sell alongside fund managers.
As of the most recently reported quarter ended March 31, Bank of America was one of Mohnish Pabrai's top holdings. For another take on the stock, here is why TheStreet Ratings rates Bank of America a buy.
First Trust Dow Jones Internet ETF
It's surprising to see the First Trust Dow Jones Internet ETF (FDN) on the list of most-sold fund holdings. This $1.7 billion exchange-traded fund is an obscure name to rank alongside household names such as IBM and Bank of America in terms of shares sold. But funds absolutely hate FDN right now, and they're selling this fund en masse as a result. Last quarter, funds sold 5.1 million shares of the Internet ETF, leaving just 652,000 shares in their portfolios when the quarter ended.
The First Trust Dow Jones Internet ETF owns a concentrated basket of internet companies. Given the huge returns of Internet names in the beginning of 2014 (and the big correction in momentum names last quarter), it's not hard to see why this ETF would be a popular holding for hedge funds chasing that performance (or why they'd be sellers last quarter). FDN is a top-heavy ETF: The top 10 holdings in FDN add up to more than 54% of its total portfolio. Amazon.com (AMZN) alone contributes 9.15% of the fund's allocation. Google (GOOG) is another 10%. And Facebook (FB) and eBay (EBAY) are weighted 8.5% and 6.1% respectively. While that makes FDN a good way to get exposure to large cap internet names, this isn't a very useful ETF for investors who want exposure to more exciting (and volatile) IPO names.
The irony is that fund managers' timing couldn't have been much worse in selling FDN. That's because, since the end of May, Internet names have bounced back in a big way -- and FDN has climbed more than 10% versus a 6% move in the S&P 500. From a purely technical point of view, it looks like momentum is alive and well in this ETF again, and the fund could see higher ground before the year is over. A breakout above $61 is a significant buy signal to keep an eye on.
For exposure to "Internet stocks" as a group, there's no easier way to get it than the First Trust Dow Jones Internet ETF.
Fund managers' timing on Hasbro (HAS) has been a lot better. Hasbro is down 8.4% from its second-quarter high water mark, and funds have been selling off shares along the way. All told, early filing funds unloaded 4.37 million shares of the $7 billion toymaker, a number that adds up to 70% of their previous holdings in HAS.
So should you sell too?
Hasbro sells some of the most important (and best-monetized) brands in the toy business, including Transformers, My Little Pony and G.I. Joe. The firm also owns a stake in The Hub, a children's TV channel that's a joint venture with Discovery Communications (DISCA). The connections between entertainment and toy sales are impossible to ignore -- and it certainly beats the conventional sales model of paying to advertise elsewhere. Licensing other brands is another important source of revenues for HAS: the firm's licenses include hugely popular names like Star Wars and Marvel.
While Hasbro has some impressive bona fides, real growth hasn't been there for the last several years. The firm's second-quarter earnings call on Monday was a disappointment to investors (even though the firm beat expectations on a comparable basis), and momentum has clearly rolled over in shares. Hasbro may be the most front-and-center toy stock, but it hasn't been executing like it should be. I'd be selling shares alongside fund managers this quarter.
Last up on hedge funds' sell list is iconic candy maker Hershey (HSY) Funds unloaded 790,000 shares of the confectionary stock last quarter, dropping their stakes by almost $74 million at today's prices.
Hershey is the biggest candy company in the country, with a 43% share of the total domestic market for chocolate. Besides its namesake brand, some of the notable names in Hershey's portfolio include Reese's, Kit Kat, and Twizzlers. HSY's sales are extremely concentrated here in the U.S. While the firm has a presence in some 70 countries, those overseas sales only contribute 15% to the top line. And while that presents a material growth opportunity for HSY in the years ahead, management has had a long time to address that void with limited progress.
The real black clouds for Hershey are commodity costs. The firm has already announced that it will be hiking prices next year thanks to pressure from input costs, but the modest price increases shouldn't impact demand. P rivate label candy sales are minimal, and Hershey enjoys strong consumer stickiness with its brands. HSY has quietly been delivering stair step growth for shareholders in recent years and, despite under-exposure to international sales, that trend looks likely to continue (especially given those price hikes next year).
Hershey isn't a flawless name, but funds are premature in unloading it.
As of the most recently reported quarter ended March 31, Hershey showed up in Renaissance Technologies' portfolio. I also featured it last month in "5 Dividend Stocks That Want to Pay You More in 2014."
To see these stocks in action, check out the Institutional Sells portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.