BALTIMORE (Stockpickr) -- Investors can glean a wealth of information by looking at what the big money is doing. Big institutional money managers employ teams of Wall Street's smartest investment professionals to monitor every little move stocks make. By watching their publicly-available trades, investors can take advantage of all of that complicated legwork.
But more often than not, individual investors make a huge mistake when they follow hedge funds: They only think about the stocks that the pros are buying. And they ignore the stocks those funds are selling.
When institutional investors unload stocks en masse, they're sending 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.
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 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.
Those hated names were plentiful last quarter. On a net basis, funds sold down every sector except two.
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, without further ado, here's a look at five stocks fund managers hate.
2015 has been a wash so far for shareholders of tech giant Microsoft (MSFT). The $382 billion firm is up all of 1% since the calendar flipped to January, a move that hasn't instilled all that much confidence in investors. That's certainly been true in the institutional world, where Microsoft topped funds' sell lists. All told, big institutions unloaded 51 million shares of MSFT during the quarter, a $2.3 billion sell operation at current price levels.
So should you follow suit and sell your MSFT shares?
First, it's important to remember that Microsoft is a company in transition. The firm's CEO just finished up his 15th month at the helm, not much time to completely refresh Microsoft's business strategy. Still, time is something that Microsoft has plenty of. The firm's core businesses continue to be mission-critical software products such as its Windows operating system and Office productivity suite. That legacy business provides a hefty subsidy toward Microsoft's other ventures. And newer offerings, such as Microsoft's Azure cloud computing solution, are already moving the growth needle.
Financially speaking, Microsoft is in excellent shape. The firm currently carries approximately $67.9 billion in net cash and investments, enough to cover about 18% of Microsoft's current market capitalization. That's a considerable discount on shares, and it gives Microsoft an ex-cash price-to-earnings ratio in the mid-teens. Price momentum is finally starting to come alive in Microsoft again as shares push toward 52-week highs this month.
I think funds got this one wrong by selling here.
Bank of America
Bank of America (BAC) is another recent underperformer that's drawn the ire of hedge funds in recent months. Shares of BofA have slipped about 6.5% year-to-date, a pretty noticeable plunge at a time when good performance has been hard to come by. So funds unloaded $71.4 million shares of BAC in the most recent quarter, a nearly $1.2 billion sell order at current levels.
Bank of America has been a bit of a tough stock to own in recent years. Coming out of the Great Recession, BofA sported a labyrinthine balance sheet and mountains of event risk surrounding legal judgments from the timeframe. But now, some six years after the fact, Bank of America seems to finally have made it past its problems.
To be clear, the new firm won't earn the sorts of returns on capital that it once did. Tighter regulations guarantee that. But thanks to a multi-year asset rally, the firm's loan book looks good again, its investment arm is seeing balances rise, and it's attracting huge cheap deposits like never before.
There's something to be said for the banking business -- especially when you have the sort of scale seen at Bank of America. The possibility of rising interest rates could help widen the spread that BofA earns on lending, providing a persistent boost to profitability. And shares are finally catching a bid again, this week testing a mid-term breakout above $16.75 resistance.
Put simply, I think that BAC is heading higher in the near-term, but it's far from the best-positioned financial sector stock right now.
For lack of a better term, railroad stocks have gotten more or less railroaded in 2015, slipping from the middle of February to today. Big names such as Union Pacific (UNP) haven't been spared. In fact, Union Pacific was one of the most hated stocks by funds in the first quarter of this year, as institutions sold more than 2.57 million shares. That's a $270 million reduction at current price levels.
Union Pacific is one of the largest railroads on the planet, with more than 32,000 miles of track that links 23 states, Canada and Mexico. Ironically, plummeting commodity prices have put pressure on shares of this transportation giant.
Sure, it's a whole lot cheaper for Union Pacific to move freight when diesel prices are low, but low energy prices make costlier and more convenient truck freight more economically viable for more shippers -- a major detractor to railroads. (In general, rail shipping costs around one-fourth as much as trucking does per ton shipped.)
Likewise, with huge volumes from hauling commodities like coal, chemicals and agricultural products, falling commodity prices have squeezed transport volumes. As long as a strong dollar and low commodity prices persist, UNP should continue to underperform. This is a trade where it makes sense to take hedge funds' lead.
Jim Cramer spoke to Union Pacific's CEO recently and remains excited about the prospects for rail.
Twenty-First Century Fox
Fund managers aren't too fond of media company Twenty-First Century Fox (FOXA) right now. In fact, they hate this $69 billion firm enough that they unloaded nearly 55 million shares in the most recent quarter, enough to add up to a $1.8 billion position reduction at current prices. So is it time for you to sell Fox?
Twenty-First Century Fox owns a valuable collection of media assets, ranging from the eponymous film studio to TV networks such as Fox, Fox News and FX, to satellite TV broadcasters. Because FOXA is an integrated media company, it owns both content and channels, a pairing that gives it the ability to take advantage of existing programming on its second-tier networks. Likewise, deep content libraries are being monetized like never before thanks to the proliferation of streaming media services and digital TV and movie downloads. Those revenue sources should continue to become more important as more consumers "cut the cord" with their cable providers.
One important attribute at Fox is its international exposure. The firm has a broader presence in places such as Asia and Latin America than any of its publicly-traded peers, a fact that provides big growth opportunities as advertising revenue rises in emerging markets. That said, conventional viewership in the U.S. has been on the decline, and high operating leverage makes the line between profitability and losses deceptively thin.
This stock's technical trajectory is clearly pointing lower this summer. Twenty-First Century Fox looks best avoided for the time being.
Last up on our list of stocks that funds hate is pharmaceutical company AbbVie (ABBV). Year-to-date, the performance numbers aren't all that impressive -- shares of ABBV are only up 1.8% since the beginning of January -- but that timeframe is a little misleading. In the shorter-term, ABBV has actually been a pretty excellent performer, up more than 20% since shares bottomed in March.
It's not surprising that fund managers are a little nervous here. For instance, AbbVie earns about half of its profits from Humira, its blockbuster rheumatoid arthritis drug that falls off-patent in 2016. To combat the negative effects of a patent loss, ABBV has been working hard to wring as much as it can from Humira, getting FDA approval for other autoimmune disorders such as Crohn's disease and psoriasis. But AbbVie isn't a one-trick pony. The firm is planning some big drug launches this year that could be game changers.
Financially speaking, ABBV is in healthy shape. The firm currently carries about $8 billion in cash on its balance sheet, a level that almost totally counteracts its $10 billion debt load. Likewise, the technical factors look good here too. With its new uptrend in place, ABBV is back testing 2015 highs. Momentum is clearly in control of buyers right now, and it makes sense to join them.
Funds unloaded half a million shares of ABBV last quarter, making it one of the most-sold stocks they reported. I think they got this one wrong.