BALTIMORE (Stockpickr) -- Hedge funds' latest "hate list" is out, and some of the names fund managers are clamoring to sell may surprise you.
Most individual investors want to know what the pros are buying, but it's the sell list -- the names that institutional investors hate the most -- that represent some of the biggest conviction moves in the market.
Think about it: institutional investors unload stocks en masse it's a big message. After all, admitting to their "sell list" is often an act of contrition for hedge funds -- and even the most disciplined investors don't like admitting spotlighting the names they're getting creamed on.
So, 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? 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 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.
Without further ado, here's a look at five stocks fund managers hate.
Fund managers haven't had an exclusive on hating oil and gas supermajor Exxon Mobil (XOM - Get Report) in the last five months -- since July, shares of Exxon have dumped by 12.4%, an ugly showing considering that the S&P 500 has actually gained ground over that stretch. Lots of investors have had good reason to hate it. But funds do get the award for selling in scale; all told, funds sold off 23.43 million shares of the energy giant during the quarter, unloading a $2.14 billion stake at current price levels.
Exxon tips the scales as the biggest company in the energy business -- the firm pulled more than 2.2 million barrels of oil and 11.9 billion cubic feet of natural gas out of the ground every day last year. And its reserves sit at 25.2 billion barrels of oil equivalent, of which around half are oil. That huge exposure means that XOM has been selling off as oil prices nosedived.
The thing is, in spite of $66 oil prices, integrated supermajors like Exxon can handle the pullback -- after all, much of their costs-per-barrel are sunk at existing wells, and cash flows at well sites are a more important metric to watch here. Most of XOM's wells are very sustainable at current levels, even if heavy investments in new sites is less attractive (CEO Rex Tillerson told CNBC that the firm can handle a drop to $40 oil). Given a deep balance sheet and unmatched scale, this recent drop in prices should give XOM a more attractive alternative: scooping up the assets of smaller distressed players while oil prices remain low. Energy isn't likely to stop getting hammered in the near-term, but for investors willing to play the long game, Exxon looks pretty attractive here after a double-digit haircut to its share price.
Now looks like a good opportunity to buy the shares that fund managers are running away from.
Drugstore chain Walgreen Co. (WAG) has shown investors a strong year in 2014, rallying almost 20% since the calendar first flipped to January. That hasn't been a straight-up trajectory, but patience has been rewarded for investors who've held onto shares. Fund managers haven't been so patient with WAG -- in fact, this $65 billion retailer was one of the stocks most-sold by funds last quarter.
All told, funds unloaded 37.7 million shares of Walgreen. That's a $2.6 billion collective sell order at current price levels.
Walgreen is the nation's biggest retail pharmacy chain, boasting some 8,500 locations across the country. Even though prescription drugs make up a small chunk of store footprints today, the economics of the drugstore business haven't changed much. Pharmaceuticals contribute around two-thirds of Walgreen's sales today. There are some newer growth drivers, but they're on the healthcare side, not the retail side of the business. For instance, the firm has been adding clinics to its locations, a move that should generate bigger margins and get more bodies into Walgreen’s stores, boosting top line numbers on convenience items.
While competition has been strong among the drugstores, the fact remains that a rising tide should continue to lift all ships in the space thanks to growing pharmaceutical coverage among Americans and an aging population. The problem is that you're paying an awful lot for that upside potential. WAG's price looks overblown at current valuation levels -- while that momentum should hold up in the near-term, long-term investors can probably find bigger returns elsewhere.
Media company CBS Corp. (CBS - Get Report) is another name that funds hate. Funds unloaded 71.7 million shares of CBS last quarter, cutting their overall holdings by around 20%. That makes CBS one of the higher conviction sells on our list.
Most consumers know CBS best for its television network -- among other assets, it also owns more than two-dozen TV stations, Showtime, CBS Radio, and a 50% stake in CW network. Owning media has proven fruitful lately; as more diverse operators move into streaming video, firms with content libraries should be able to collect bigger returns on long-time stagnant assets. CBS owns some of the most valuable content libraries in the business, and that's not fully reflected in this stock's price at this time.
Back in the TV business, CBS is benefitting from higher advertising rates in 2014. Beyond the firm's own shows, it also owns the rights to valuable sports franchises like the NFL and NCAA March Madness, as well as broadcast news, which are both typically viewed live. That’s a big value justification for the big dollars that CBS charges national advertisers for those time slots.
All of that said, the firm trades for a P/E ratio above 20, and it sports a leveraged balance sheet with close to $7 billion in debt. Neither of those factors is a deal-breaker for investors, but together they paint a less-than-attractive picture at a time when investors are anxious about lofty valuations. Moreover, momentum looks atrocious in shares of CBS right now -- it looks like funds made the right move by selling shares.
Fund managers hate American Express (AXP - Get Report) right now, which is ironic, considering that this financial powerhouse was one of the most-bought institutional names back in the first quarter. Now, not so much. For the last two quarters, it's been on the sell list. More recently, over the course of the third quarter, funds unloaded 17.24 million shares of AmEx, unloading what amounts to a $1.6 billion position at current price levels.
Yes, American Express is a payment network, but it's so much more. That's because, unlike peers Visa (V) and MasterCard (MA) , it's also the lender behind the logo on many of its cards. So while the firm has to think about credit risk, it also gets to collect a bigger piece of the fee pie for its trouble. It certainly collects big fees -- for most merchants, American Express comes with higher fees than the competition (consumers, not merchants, pick which card comes out of the wallet, giving AXP a big advantage). As American Express expands its reach with third party issuers, expect sales to continue to ramp up without the risk.
Even though AXP lacks the size of its rivals, its network actually attracts more dollar volume than the other networks, a byproduct of courting higher-spending customers and businesses. The shift to electronic payments continues to be an important trend that should lift all ships in the payments business -- but it'll boost American Express' bottom line more than the others. The funds got AXP wrong this fall; look for this stock's uptrend to continue into 2015.
Monsanto (MON) is having a pretty mediocre year in 2014 -- year-to-date, shares of the $58 billion agribusiness have moved up by just 3.2%. Much of that pressure has come from pressure on Monsanto's customers: with soft commodity prices down big in the last year, the farmers who use Monsanto's yield-improving tech are less inclined to plant the firm's genetically modified seed. Even though the long-term trends point to more demand for ag yield (particularly in emerging markets), the fact remains that, as long as crop prices hover close to the cost of production, MON will see pressure.
Besides seed products, Monsanto also sells the Roundup line of herbicide. Strong R&D investment now should pay off long-term at Monsanto. The firm spends approximately 10% of sales on product development each year, a short-term cost that's absolutely necessary considering development cycles resemble those seen at pharmaceutical firms.
Despite the benefits that MON brings to farmers' fields, the firm has historically had a fairly adversarial relationship with farmers. (MON has been heavy-handed with litigation aimed at farmers who use the firm's patent-protected seeds out of license, whether intentional or not.) Fixing that relationship while Monsanto is at its strongest could help the firm maintain high levels of profitability down the road as its traits fall off of patent protection.
Funds sold 19.7 million shares of MON last quarter, making it one of the most-sold stocks on our list. Given the intermediate-term trajectory of agricultural commodities in 2014 (down), I think the funds are right in selling Monsanto here.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the 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 that 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.
Follow Jonas on Twitter @JonasElmerraji