Dump Your Hedge Funds and Buy This Stock: New Pick Inside

On January 8, 2013 we published an article titled “Dump Your Hedge Funds and Buy This Stock”. The premise of the article was pretty simple. Hedge funds aren’t good at picking large cap picks but our research has shown that they are unbelievably talented at picking small cap stocks. Historically the 15 most popular small-cap stocks among hedge funds outperformed the market by an average of 18 percentage points per year. This isn’t a typo. These stocks really killed the market and their performance boosted the popularity of hedge funds.

Can hedge funds beat the market

This, however, doesn’t mean that you should go ahead and hand over your hard earned dollars to hedge fund managers. Actually there are only a few hedge funds that deserve that. There is a better alternative to hedge fund investing. Historically buying the 15 most popular small-cap stocks among hedge funds yielded higher returns than top hedge funds and the best part is that you didn’t have to surrender 2% of your nest egg and 20% of your returns every year. In our January 2013 article we didn’t reveal the list of these 15 stocks but we revealed the most popular stock. United Rentals (URI), which closed at $48.10 that day, was the most popular stock among hedge funds at that time and it is still wildly popular. Actually we first recommended that stock in the first issue of our newsletter at the end of August 2012 when it was trading at $32.

Today, a year after our article, United Rentals is trading at $81.71. That’s a return of 70%. How many hedge funds returned 70% over the past 12 months? We were spot-on by telling you to dump your hedge funds and buy United Rentals.

The moral of the story is simple. Investors shouldn’t waste their time by checking out mega-cap stocks like Apple Inc (AAPL). I still remember David Einhorn estimating that Apple is worth $1000 when it was trading at $700. It would have been a much better approach to imitate Einhorn’s and other hedge funds top small-cap picks. United Rentals isn’t an exception. Our quarterly list of 15 most popular stocks gained more than 53% in 2013 (see a sample of these stocks here). Their performance was slightly better than their historical performance.

Today, we are going to share this year’s most popular small-cap stock among hedge funds: JC Penney (JCP). Personally, this stock turns my stomach. JC Penney has been one of the worst performers last year and Bill Ackman lost a bundle and threw in the towel last September. Since then, the stock lost another 50%. It seems like JC Penney is the worst stock that anyone can pick right now. Sixty two hedge funds think otherwise. United Rentals used to have 50-52 hedge funds with bullish positions when it was at the top of our list last year. JC Penney is significantly more popular than United Rentals. That’s why we think JCP may be an even bigger winner over the next 12 months.

JC Penney makes me nervous because it is operating in a very competitive industry. Turning around a loser in a cut throat industry is one of the most difficult things to do. Hedge funds think that JC Penney can easily double if it just stops losing money. We should warn you that if it doesn’t it can easily become a penny stock.

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