Apple Inc. (AAPL), Whole Foods Market, Inc. (WFM): Meet The Stocks Hedge Funds Are Dumping Like Crazy

We maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors. There are a variety of uses for this information. One of these is in developing investment strategies, and we’ve shown not only that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy) but that these returns can be replicated (our own portfolio based on these findings beat the market by 33 percentage points in the last 11 months).

Another use is to look for trends in what hedge funds are buying and selling. Widespread hedge fund exodus from a stock isn’t necessarily a strong bullish signal, but investors should be aware when sentiment from “the smart money” is turning. We have gone through our database and here are the five stocks where the net decrease in the number of hedge funds owning the stock from Q1 to Q2 2013 was the largest:

While Apple Inc. (NASDAQ:AAPL) is still one of the most popular stocks among hedge funds (check out the full top ten list), it fell from the most popular of all to the #3 slot as 26 funds sold out of the consumer technology company on net. With Apple Inc. (NASDAQ:AAPL) now at about $500 following billionaire activist Carl Icahn’s reveal that he will push for a larger buyback at the company, the stock is valued at 13 times trailing earnings. With a good deal of that market cap in the form of cash and marketable securities, markets seem to be pricing in a continued decline in Apple Inc. (NASDAQ:AAPL)’s earnings; net income fell by 22% in the company’s most recent quarter compared to the same period in the previous fiscal year.

25 filers in our database reported a position in premium grocer Whole Foods Market, Inc. (NASDAQ:WFM), down from 39 at the end of March. The company has been recording double-digit growth rates on both top and bottom lines, but markets have given the stock quite a high valuation- particularly compared to other grocery stores- with the forward P/E being 30. As a result even if the company is able to continue this high growth in the short term we couldn’t recommend buying at these prices. Renaissance Technologies, founded by billionaire Jim Simons, was bucking the trend and buying Whole Foods Market, Inc. (NASDAQ:WFM) according to its 13F (see Renaissance’s stock picks).

Hedge funds were also selling Morgan Stanley (NYSE:MS) during the quarter, per our database. This is in contrast to their attitudes on many other large banks, which make up a decent share of their favorite stocks. Up 80% in the last year, Morgan Stanley still trades at a discount to the book value of its equity with a P/B ratio of 0.8. Wall Street analysts expect recent improvements in earnings to continue, and as a result the forward earnings multiple is 10 (in line with the bank’s peers). Billionaire Louis Bacon’s Moore Global was one of the funds selling its entire Morgan Stanley stake.

MOORE GLOBAL INVESTMENTS

On net, 11 funds and other investors closed their positions in Walgreen Company (NYSE:WAG) in the second quarter of 2013. The third quarter of the pharmacy and convenience retailer’s fiscal year ended in May, with little change in sales versus a year earlier but higher net margins which resulted in a 16% increase in profits. Analysts are forecasting continued improvements on the bottom line, resulting in earnings per share of $3.54 for the forward fiscal year; at current prices that makes for a forward P/E of 14 which actually does not seem so bad for a retailer in the present environment.

Defense contractor General Dynamics Corporation (NYSE:GD) also saw a number of hedge funds leaving the stock last quarter. This may be due to concerns that cuts in federal military spending will impact the company and other players in the aerospace and defense industry. While some peers have actually been seeing increases in earnings, General Dynamics Corporation (NYSE:GD) disclosed flat sales and net income in the second quarter of 2013 versus a year earlier. At a forward P/E of 12 it doesn’t look to attractive compared to similar companies, who also often offer high yields as well. Citadel Investment Group cut its stake in General Dynamics by 46%; that fund is managed by billionaire Ken Griffin (find Griffin’s favorite stocks).

Disclosure: I own no shares of any stocks mentioned in this article.

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