Hedge funds retreated from U.S. stocks in the third quarter, as they were not immune to the volatility that roiled the markets in August.

The top 10 hedge funds had aggregated equity holdings of $191 billion for the September-ending quarter, down from $200 billion in the second quarter, according to S&P Capital IQ, a division of McGraw Hill Financial, in its quarterly hedge fund tracker. The report analyzed Securities and Exchange Commission 13-F filings by the 10 largest hedge funds by asset size to spotlight big buying and selling trends.

The decline in holdings reflected decreased value of hedge funds current positions as well as an overall decline in equity positions to 441 stocks from 471 stocks in the prior quarter, S&P Capital IQ's report said.

The information technology sector had the biggest sell off from large hedge funds last quarter. The group sold $1.39 billion worth of stocks from the sector. It was the third consecutive quarter that information technology stocks led hedge fund selling, the note said. The financial sector followed. There, large hedge funds sold $1.38 billion in stocks during the quarter, followed by sales in the telecom sector.

Notably, eBay (EBAY - Get Report) , which spun off its payments subsidiary, PayPal (PYPL - Get Report) in July, was the most sold stock of the quarter. PayPal was one of the quarter's biggest purchases by hedge funds, mostly due to Carl Icahn's swap of eBay shares for PayPal shares.

Hedge funds were active in the consumer staples sector as these stocks then to be non-cyclical. The top 10 largest hedge funds purchased a combined $3.7 billion in sector positions last quarter.

Check out the five stocks with the biggest sell off by hedge fund managers in the third quarter. (The list includes both sold out positions and share decreases.) TheStreet highlights notable new or added positions on each of the five stocks, pairing the companies with ratings from TheStreet Ratings, TheStreet's proprietary ratings tool.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

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5. MasterCard (MA - Get Report)
Market Cap: $112 billion
Year-to-date return: 15.5%
Who Sold?: Tiger Global, Viking Global, Lone Pine Capital

Tiger Global sold 4.6 million shares of MasterCard last quarter. The hedge fund's remaining stake is worth $246 million. Viking Global sold 2.8 million shares and has a remaining stake worth $546 million. Also, Lone Pine Capital sold 1.4 million shares, leaving it with a $832 million stake in MasterCard, according to Bloomberg


TheStreet Said: TheStreet Ratings team rates MASTERCARD INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

We rate MASTERCARD INC (MA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 27.0%. Since the same quarter one year prior, revenues slightly increased by 1.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • MA's debt-to-equity ratio is very low at 0.24 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.29, which illustrates the ability to avoid short-term cash problems.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the IT Services industry and the overall market, MASTERCARD INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
  • The gross profit margin for MASTERCARD INC is rather high; currently it is at 60.95%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 38.61% significantly outperformed against the industry average.
  • MASTERCARD INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MASTERCARD INC increased its bottom line by earning $3.09 versus $2.57 in the prior year. This year, the market expects an improvement in earnings ($3.35 versus $3.09).
  • You can view the full analysis from the report here: MA

 

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4. Microsoft Corp. (MSFT - Get Report)
Market Cap: $431 billion
Year-to-date return: 16.1%
Who Sold?: ValueAct Capital, Lone Pine Capital

ValueAct sold 18.7 million shares in the third quarter of Microsoft. Its remaining stake is worth $3.1 billion, according to Bloomberg. Lone Pine Capital sold 1.3 million shares. Its remaining stake is worth $1.4 billion. 

TheStreet Said: TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, increase in net income, reasonable valuation levels, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Software industry average. The net income increased by 1.8% when compared to the same quarter one year prior, going from $4,540.00 million to $4,620.00 million.
  • The gross profit margin for MICROSOFT CORP is currently very high, coming in at 71.80%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 22.67% is above that of the industry average.
  • Net operating cash flow has slightly increased to $8,594.00 million or 2.87% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -10.48%.
  • You can view the full analysis from the report here: MSFT

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3. Illumina Inc. (ILMN - Get Report)
Market Cap: $25.5 billion
Year-to-date return: -5.8%
Who Sold?: Viking Global, Lone Pine Capital

Viking Global sold 3.2 million shares of Illumina last quarter, leaving it with a stake worth $311 million, while Lone Pine Capital sold 2.1 million shares, leaving it with a stake worth $627 million, according to Bloomberg.


TheStreet Said: TheStreet Ratings team rates ILLUMINA INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

We rate ILLUMINA INC (ILMN) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues rose by 14.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.57, is low and is below the industry average, implying that there has been successful management of debt levels. Along with this, the company maintains a quick ratio of 3.17, which clearly demonstrates the ability to cover short-term cash needs.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Life Sciences Tools & Services industry. The net income increased by 26.4% when compared to the same quarter one year prior, rising from $93.49 million to $118.18 million.
  • ILMN has underperformed the S&P 500 Index, declining 16.87% from its price level of one year ago. Looking ahead, we do not see anything in this company's numbers that would change the one-year trend. It was down over the last twelve months; and it could be down again in the next twelve. Naturally, a bull or bear market could sway the movement of this stock.
  • You can view the full analysis from the report here: ILMN

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2. The Priceline Group (PCLN)
Market Cap: $63.6 billion
Year-to-date return: 12%
Who Sold?: Viking Global, Lone Pine Capital, Glenview Capital

Tiger Global sold completely out of its position in Priceline, in which it owned 727,000 shares. Lone Pine decreased its position by approximately 200,000 shares, leaving it with a stake worth $1.3 billion, while Glenview Capital sold 56,000 shares, leaving it with a remaining stake worth $269 million, Bloomberg said. 

TheStreet Said: TheStreet Ratings team rates PRICELINE GROUP INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

We rate PRICELINE GROUP INC (PCLN) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • PCLN's revenue growth trails the industry average of 38.2%. Since the same quarter one year prior, revenues slightly increased by 9.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.64, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. To add to this, PCLN has a quick ratio of 2.49, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Internet & Catalog Retail industry and the overall market, PRICELINE GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • The gross profit margin for PRICELINE GROUP INC is currently very high, coming in at 94.54%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 38.56% significantly outperformed against the industry average.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: PCLN


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1. eBay (EBAY - Get Report)
Market Cap: $35 billion
Return from PayPal Spin Off (July 20): 2%
Who Sold?: Icahn Capital, Glenview Capital

Carl Icahn sold all 46 million shares of his eBay position, worth $1.6 billion, according to S&P Capital IQ. Glenview also sold 1.1 million shares of its stake, now worth $66 million, according to Bloomberg

TheStreet Said: no rating available