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Five Small-Cap Stocks That Hedge Funds Were Dumping in Q2

For most of the second quarter, US stock market was rather choppy with the most important indices trading it a tight range. As the stock market took a breather, hedge funds were looking to lock in some profits or free up capital for new investment opportunities. In this article we’ll take a look at some of the stocks that hedge funds chose to dump during the second quarter.

Hedge fund sentiment is an important metric for assessing long-term profitability. At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze to determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (read more details here).

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Getting Out Early

First up is VWR Corp (NASDAQ:VWR). During the second quarter, the number of hedge funds invested in the stock fell to 21 from 29 recorded at the end of the first quarter. Barry Rosenstein’s JANA Partners was among the funds that dumped their entire stake in the company, having disposed of 150,000 shares. Billionaire Ken Griffin, on the other hand, chose to increase his fund’s stake in VWR Corp (NASDAQ:VWR) by 19%. According to its latest 13F filing, Citadel Investment Group held 1.23 million shares worth $35.5 million at the end of June. The stock has spent most of the second quarter in an uptrend and continued to go higher until the end of July, when it peaked and entered into a correction. Shares have ended Tuesday’s trading session at $28.45, up 2% for the year. VWR Corp (NASDAQ:VWR) reported second quarter financial results on August 4, posting a profit of $41.8 million. The company said it registered adjusted earnings of $0.42 per share, in line with Wall Street’s expectations, and revenue of $1.15 billion, slightly above analysts’ consensus of $1.14 billion.

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Community Health Systems In Transition

The popularity of Community Health Systems (NYSE:CYH) among the hedge funds in our database has also taken a serious hit, as the number of long hedge fund positions dropped from 42 to 33 by the end of June. Together, these funds hold approximately 20% of the company’s outstanding stock. While David Tepper’s Appaloosa Management was buying Community Health Systems (NYSE:CYH) stock left and right, having amassed 6.27 million shares by the end of June, Jim Simons‘ Renaissance Technologies sold out of its holding that had contained 1.03 million shares at the end of the previous quarter. After the spin off of Quorum Health Corp (NYSE:QHC), Community Health Systems still operates 160 hospitals, which are expected to generate $17.8 billion in revenue this year. The company is currently in a transitional period, aiming to reduce its debt burden through asset sales. Having already raised $1.2 billion from the sale of Quorum Health, Community Health Systems (NYSE:CYH) is considering additional divestitures to lighten its debt load even further.

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Gift Card Business In A Slump?

Blackhawk Network Holdings Inc (NASDAQ:HAWK) According to our data, the number of funds bullish on this stock fell by 13 during the second quarter to 22 funds, together holding roughly 18% of the company’s common stock. Dmitry Balyasny decided to unwind his investment in the company during the quarter, as Balyasny Asset Management sold off the 32,480 shares it previously held. In the meantime, Jim Simons’ Renaissance Technologies cut its exposure to Blackhawk Network Holdings Inc (NASDAQ:HAWK) by 26%, reducing its holding to 569,763 shares worth $19.1 million at the end of June. A provider of gift and telephone cards, Blackhawk Network has a market cap of $1.77 billion and does not pay a dividend. So far this year, the stock has been deep in the red zone, although it seems to have found a bottom around the $31 level. It fell by 24% since the start of the year through Tuesday’s closing price of $32.62 per share. For the second quarter, Blackhawk Network Holdings Inc (NASDAQ:HAWK) posted a loss of $11.3 million, although it actually earned $0.37 per share when accounting for non-recurring costs and stock option expense, topping analysts’ estimates of $0.25 per share. Revenue came in at $183.7 million, in line with Wall Street’s expectations.

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Everybody Is Bearish

Williams-Sonoma, Inc. (NYSE:WSM) has also witnessed a drop in popularity during the second quarter. At the end of June, only 18 of the funds followed by Insider Monkey had this stock in their portfolio, down from 31 at the end of March. Kamyar Khajavi’s MIK Capital unloaded 515,440 shares of Williams-Sonoma, Inc. (NYSE:WSM) during the quarter, while Joel Greenblatt‘s Gotham Asset Management dumped 83% of its holding, reducing it to 72,705 shares valued at $3.79 million according to its latest 13F filing. Williams-Sonoma, Inc. (NYSE:WSM) is set to announce second quarter results today after the closing bell and investors are looking for $0.58 in earnings per share. Revenue is expected to reach $1.17 billion, up from the $1.13 billion reported for the 2015 second quarter. In a recent note to investors, Barclays has expressed its bearish views on this stock: “We believe there is an industry shift to the value channel, which is supported by recent data points and could point to WSM share loss. We remain bearish on WSM and believe there is valuation risk in the stock.”

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Hedge Funds Run From Endo International

At the end of the second quarter, 18% of the Endo International plc – Ordinary Shares (NASDAQ:ENDP)‘s outstanding shares were held by 36 of the funds in our database, down from 49 registered a quarter earlier. Tiger Cub Andreas Halvorsen was among the investors that decided to dump the stock, as his fund, Viking Global, sold off 4.47 million shares during the quarter. Rob Citrone and his team have also decided to liquidate Discovery Capital Management’s entire stake in the company, that had previously amounted to 4.08 million shares. An Irish pharmaceutical company, Endo International plc – Ordinary Shares (NASDAQ:ENDP) has seen its stock plummet by as much as 79% so far this year, before regaining some of the lost ground. Shares are currently changing hands at $24.60 apiece, down by 59% year-to-date. Back in February, the company decided to close its Astora Women’s Health division due to some product liability concerns, but was unsuccessful in finding a buyer. Increased competition in the generic market has also put pressure on Endo International plc – Ordinary Shares (NASDAQ:ENDP) and the management was forced to slash its forward guidance when a competing product received an early FDA approval. Nevertheless, Endo International expects to remain profitable in 2016 and plans to bolster its revenue stream with the launch of roughly 30 new generic drugs this year.

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Disclosure: none.

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