Hedge funds' hate list might just surprise you in 2016.
Individual investors love to check out what the pros are doing. Too often though, they only focus on what big name funds and portfolio managers are buying. The thing is, there's often more to learn from what the pros are selling at any given time.
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 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 couple of years 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. Today, we'll take a look at five stocks that are getting the most selling from institutions as a group.
Without further ado, here's a look at five stocks fund managers hate.
Unloading Amazon.com (AMZN - Get Report) has been a bad move for pro investors in 2016. That's because Amazon has been a solid performer so far this year, up more than 7% since the calendar flipped to January. But sure enough, Amazon was one of the most-sold stocks last quarter, with more than 1.43 million shares sold; that's a billion-dollar sell operation at current price levels.
Amazon dominates the e-commerce business. The firm generated more than $107 billion in sales during 2015, a 75% top-line increase over the prior three years. That breakneck growth continues to push on as Amazon muscles its way into new business categories. For instance, Amazon generated 7% of its sales from its cloud computing services last year, a category that wasn't even big enough to be reported separately as recently as 2012.
Amazon is the best example of what can happen when a company has scale. The firm is able to spread its substantial infrastructure costs across an utterly massive number of orders, keeping the per-unit cost of fulfillment low. And more innovative investments -- such as the firm's leasing of freighter aircraft and doubling down on local delivery capabilities -- should start bearing fruit in the near future. Buyers are clearly still in control of Amazon's price action this year, and it's a mistake to follow hedge funds' lead on selling this stock.
Banking giant Citigroup (C - Get Report) was another one of funds' most-hated stocks last quarter. All told, the pros unloaded 69.37 million shares of Citi in the first quarter of 2016, a $3.1 billion sell operation at current price levels. At first blush, it's not surprising that funds dumped Citi in the first quarter -- the entire banking sector was getting crushed at the start of the year. But things are looking a lot less obvious this summer, as the Fed mulls over when to pull off its next interest rate hike.
Citigroup is one of the biggest financial institutions in the world, with more than $1.7 trillion in global assets. Citi, like its large banking peers, has been spending the last few years figuring out how to do more with less. A combination of low interest rates and increased regulatory requirements following 2008's financial crisis have meant that the firm earns much smaller returns on its huge capital base than it did a decade ago. But Citi's big differentiator is its exposure to emerging economies, which is larger than that of its peers. If the U.S. dollar continues to correct in 2016, buoying overseas markets, Citi could benefit.
Rising rates have been an important catalyst in the 30% price rebound shares of Citigroup have undertaken since February. Higher rates mean higher net interest margins for lenders, and that potential for vastly increased profits is getting investors excited about banks again. Citi's size makes it a good way to play that trend in 2016.
Citigroup is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Cramer and Research Director Jack Mohr wrote on Friday:
"Although Citi remains highly tethered to rates, it is the most undervalued big-bank stock (trading at a 30% discount to tangible book value) given its solid regulatory standing, something that cannot be overlooked, especially ahead of the Fed's stress tests in the coming weeks. The biggest risk in the financials is regulatory risk, which is ultimately why we rotated into Citi. We appreciate its efforts to shrink its assets (it is now the fourth-biggest U.S. bank by assets, down from No. 1), simplify its operations and standardize its internal reporting mechanisms since the financial crisis, in particular over the last two years."
Valeant Pharmaceuticals (VRX is another hated stock that probably comes as a surprise to nobody. Valeant came into 2016 as a notable holding by several large funds -- and many smaller ones. But shares have plummeted more than 75% since the start of the year thanks to a handful of controversies, allegations of fraud and an SEC investigation.
And while the firm's biggest proponents have held their positions, other funds unloaded more than 33 million shares in the first quarter, a sell operation that would have amounted to approximately 41% of today's market capitalization at the prices shares traded for back in January.
Despite the huge issues underlying Valeant right now, it is a real business. The firm is a major player in the specialty pharma business, with a diversified portfolio of drugs that focuses on branded dermatology, aesthetics, and eye health products. In recent years, management rolled up major acquisitions to build the firm's size, resulting in a massive debt load that's become a major concern for investors. And even though Valeant is still likely to make it out the other side of its current quagmire intact, the huge haircut on this stock's price tag this year now more adequately reflect those huge levels of leverage.
New management and a drastically lower market valuation should go a long way in helping to right the Valeant ship, but as this week's guidance cut shows, the firm is far from out of the woods. This looks like one hated stock that the funds were right to sell.
Another pharma stock that funds unloaded last quarter was Gilead Sciences (GILD - Get Report) . Gilead may not have seen the drama that Valeant has experienced this year, but that doesn't mean that it hasn't taken its own share of bruises alongside the overall pharma market. Year-to-date, Gilead has shed more than 13% of its market value. And funds helped to add to that selling pressure during the first quarter, dumping 63.5 million shares of the firm on a net basis.
Gilead Sciences is one of the biggest developers of infectious disease treatments, with a huge business battling HIV and hepatitis. More recently, the firm has acquired its way into portfolios of cardiovascular and cancer treatments, widening its reach and reducing exposure to disease categories that the scientific community is hyper-focused on.
Gilead's financials are in good shape, with a big enough cash and investment position on the firm's balance sheet to totally offset its $21 billion debt load. That said, pharma stocks have been correcting recently, and Gilead hasn't been immune to the performance drag. Shares are holding onto a downtrend right now, which means that even if you like Gilead fundamentally, this may not be the best time to buy it.
Ironically, Gilead was one of hedge funds' most-bought stocks this time last year. Now it makes sense to side with fund managers for the sell.
Last on our list of funds' most-hated stocks is banking giant Wells Fargo (WFC - Get Report) . Like its hated peer Citigroup, many of the same major market catalysts are in play in Wells right now. The major difference with Wells Fargo is that it's the more attractive of the two stocks in 2016.
Wells Fargo has long been one of the best-positioned of the big-four U.S. banks. From a scale perspective, Wells is massive with nearly $1.8 trillion in total assets. No surprise, Wells has the typical litany of businesses, including retail and commercial banking, and investment services like wealth management and brokerage. Unlike most of its peers, the firm wasn't as deeply impacted by 2008's financial crisis thanks to a better-than-average loan book that's stayed that way to today. That positioning is one reason why Wells only dropped half as much as Citi when the banks were correcting hard at the start of this year.
Access to a large cheap source of deposits means that Wells Fargo stands to benefit in a big way if interest rates (and net interest margins) head higher in 2016. That hasn't stopped hedge funds from being net sellers of this stock, though. In the first quarter, funds dumped 28.47 million shares of Wells Fargo. That timing is starting to look pretty bad as the financial sector picks up this summer.
"Although it is hardly immune from rate activity, Wells has differentiated itself by developing a more diversified business model that serves as a partial hedge against low rates. In particular, it has built out a massive mortgage servicing business, which generates substantial fees when rates are low (as more homeowners look to refinance). Regardless, the prospect for higher rates still helps widen the spread between what banks charge on loans and what they charge on deposits, thus lifting margins and boosting earnings power."