12 Out of Favor Stocks That Hedge Funds Love

Published on July 26, 2023 at 2:08 pm by Fatima Farooq in Hedge Funds, News

In this article, we will be taking a look at 12 out of favor stocks that hedge funds love. To skip our detailed analysis of investing moves today, you can go directly to see the 5 Out of Favor Stocks That Hedge Funds Love.

Investing in stocks will always be a tricky exercise. The market is plagued with high volatility, especially in times of economic crisis with the uncertainty surrounding the Federal Reserve’s interest rate hikes and high inflation. Many industries and companies have been feeling the heat turned on by the Fed as a result. In these market conditions, many investors are opting to play it safe rather than be left sorry, as they continue to be wary of stocks and sectors that have either been performing poorly over the past couple of years or those that have the potential to be beaten back in the face of a rapidly transforming market with everchanging trends. At the same time, billionaires and investors in the US are making their own moves as they track the market to pick the best time to cash in their shares and turn a profit.

Latest Insider Trades

On July 11, CNBC’s Robert Frank reported the latest moves made by top billionaires and CEOs in this market. He noted that during the first half of 2023, about $9 billion worth of shares had been sold by these individuals. They included the Waltons, the family behind Walmart Inc. (NYSE:WMT), who had sold shares of the company worth $4.39 billion year-to-date as of July 11. Joe Gebbia, the co-founder of Airbnb, Inc. (NASDAQ:ABNB), also cashed in his company’s shares worth $893 million year-to-date. Oracle Corporation’s (NASDAQ:ORCL) CTO, Larry Ellison, also added another $848 million to his wealth by cashing in the company’s shares. Safra Catz, the CEO of Oracle Corporation (NASDAQ:ORCL), also cashed in $470 million by selling her company’s shares at a prime moment. Moderna, Inc. (NASDAQ:MRNA) also saw its CEO selling its shares worth $302 million during the first half of the year. Finally, the co-founder of Apollo Global Management, Inc. (NYSE:APO) also joined the selling frenzy, making about $210 million with his sale of the company’s stock.

According to Frank, this flurry of insider selling has been primarily motivated by questions of valuation. He noted that many of the stocks in question above saw 52-week highs at the start of the year, making this an opportune moment to get out of the trade and make a profit. Yet while the market is seeing many stocks such as these performing at record high levels, there are also many companies whose stocks have been taking a hit during this year. One example is Alibaba Group Holding Limited (NYSE:BABA), a stock that is down by 8.65% over the past year as of July 14. This stock has been continuing a downward spiral for the past five years, over which period it has fallen by 49.40%. Other well-known stocks that have fallen out of favor over the past few years include The Walt Disney Company (NYSE:DIS) and Paypal Holdings, Inc. (NASDAQ:PYPL), the former being down by 3.54% over the past year and 20.53% over the past five years, while the latter is down by 17.61% over the past five years.

What Are Hedge Funds Up To?

Many factors are responsible for the worrying performance of these reputable companies, and some would assume that this performance would result in investors and hedge funds alike fleeing their positions in them. However, we have seen over the first quarter that numerous hedge funds have continued to stick by these stocks despite their poor performance, leading one to think twice before they abandon their stakes in these companies. This seems to imply that hedge funds today may be betting on companies such as the one mentioned above in the long run in hopes of making back their money and perhaps even turning a profit at the end of their trade. Considering this, we have compiled a list of 12 stocks that have similarly been performing poorly enough to lose the support of the broader market but have managed to retain the confidence of the hedge funds investing in them. Some may argue that several of these stocks are even some of the best undervalued stocks to buy today or some of the top cheap undervalued stocks on the market.

Our Methodology

We first listed down all large-cap stocks that have fallen significantly in value over the past 24 months. From these stocks, we picked 12 stocks with the highest number of hedge fund investors according to Insider Monkey’s hedge fund data for the first quarter, when 943 hedge funds were tracked. The stocks are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest number.

Out of Favor Stocks That Hedge Funds Love

12. Sea Limited (NYSE:SE)

Two-year performance: -76.6%

Number of Hedge Fund Holders: 65

Sea Limited (NYSE:SE) is a communication services company also operating digital entertainment, e-commerce, and digital financial service businesses. It is based in Singapore.

There were 65 hedge funds long Sea Limited (NYSE:SE) in the first quarter, with a total stake value of $2.9 billion.

Sachin Salgaonkar at BofA maintains a Neutral rating and a $90 price target on Sea Limited (NYSE:SE) shares as of May 17.

Cheyne Capital was the most prominent shareholder in Sea Limited (NYSE:SE) at the end of the first quarter, holding 48,800 shares in the company.

Here’s what Artisan Partners said about Sea Limited (NYSE:SE) in its second-quarter 2023 investor letter:

“Bottom contributors to performance for the quarter included Southeast Asian Internet leader Sea Limited (NYSE:SE). Sea declined due to rising investor concerns around e-commerce competition from TikTok in Southeast Asia during a period of subdued gross merchandise value growth, while the gaming business continues to struggle.”

11. Shopify Inc. (NYSE:SHOP)

Two-year performance: -52.5%

Number of Hedge Fund Holders: 66

Credit Suisse analyst Timothy Chiodo holds a Neutral rating on Shopify Inc. (NYSE:SHOP) shares as of July 14, alongside a $55 price target.

Shopify Inc. (NYSE:SHOP) was spotted in the portfolios of 66 hedge funds during the first quarter. Their total stake value in the company was $2.5 billion.

Shopify Inc. (NYSE:SHOP) is an information technology company providing and e-commerce platform and services. It is based in Ottawa, Canada.

RiverPark Advisors made the following comments about Shopify Inc. (NYSE:SHOP) in its first-quarter 2023 investor letter:

“Shopify Inc. (NYSE:SHOP): Shopify shares were a top contributor in the quarter as the market focused on the company’s recent price increases and its ongoing market share gains in e-commerce gross merchandise volumes (GMV). Earlier in the quarter the company reported better-than-expected 4Q results, with 26% revenue growth and $248 million of FCF (at a 14% margin), significantly better than the Street consensus of -$109 million.

Last year, 10% of US retail e-commerce sales flowed through SHOP, second only to Amazon, and the company is still enjoying significant tailwinds as retail merchants of all sizes adopt SHOP’s software tools to display, manage and sell their products across a dozen different sales channels. We believe that the overall growth of e-commerce, combined with the development of new products and services, such as its digital wallet Shop Pay and its pick, pack and ship Shopify Fulfillment Network, should continue to drive revenue growth of about 20% per year over the next several years, accompanied by re-acceleration of operating margin growth and FCF generation.”

Like Alibaba Group Holding Limited (NYSE:BABA), The Walt Disney Company (NYSE:DIS), and Paypal Holdings, Inc. (NASDAQ:PYPL), Shopify Inc. (NYSE:SHOP) is a stock that has managed to retain its popularity with hedge funds despite its recent performance.

10. Pinterest, Inc. (NYSE:PINS)

Two-year performance: -60.06%

Number of Hedge Fund Holders: 66

A total of 66 hedge funds were long Pinterest, Inc. (NYSE:PINS) in the first quarter, with a total stake value of $2.7 billion.

Based in San Francisco, California, Pinterest, Inc. (NYSE:PINS) is a communication services company. It operates as a visual discovery engine across the globe.

Pinterest, Inc. (NYSE:PINS) was upgraded from Equal Weight to Overweight on June 28 by Ken Gawrelski at Wells Fargo, who also raised his price target on the stock from $23 to $34.

TimesSquare Capital Management said the following about Pinterest, Inc. (NYSE:PINS) in its fourth-quarter 2022 investor letter:

“Slightly countering that decline was the 4% gain for Pinterest, Inc. (NYSE:PINS), an image-based social media company. The company posted better-than-expected third quarter results and forward guidance was in line with Street estimates. Pinterest expects significant margin improvement after a relatively heavy investment cycle.”

9. Biogen Inc. (NASDAQ:BIIB)

Two-year performance: -15.26%

Number of Hedge Fund Holders: 67

Biogen Inc. (NASDAQ:BIIB) is a biotechnology company working on neurological and neurodegenerative diseases and their treatments. It is based in Cambridge, Massachusetts.

As of July 11, Morgan Stanley’s Matthew Harrison holds an Overweight rating on Biogen Inc. (NASDAQ:BIIB) shares, alongside a price target of $355.

At the end of the first quarter, 67 hedge funds held stakes in Biogen Inc. (NASDAQ:BIIB). Their total stake value was $3.2 billion.

The largest shareholder in Biogen Inc. (NASDAQ:BIIB) at the end of the first quarter was D E Shaw, holding 1.3 million shares.

8. Fidelity National Information Services, Inc. (NYSE:FIS)

Two-year performance: -60.1%

Number of Hedge Fund Holders: 68

Atlantic Equities analyst Kunaal Malde upgraded Fidelity National Information Services, Inc. (NYSE:FIS) shares from Neutral to Overweight on July 12. The analyst also announced a $71 price target on the shares.

Fidelity National Information Services, Inc. (NYSE:FIS) is a financial company providing tech solutions for financial institutions globally. It is based in Jacksonville, Florida.

Fidelity National Information Services, Inc. (NYSE:FIS) was found in the 13F holdings of 68 hedge funds during the first quarter, with a total stake value of $2.2 billion.

Here’s what Weitz Investment Management said about Fidelity National Information Services, Inc. (NYSE:FIS) in its first-quarter 2023 investor letter:

“The portfolio holdings most directly impacted by the bank failures of the first quarter were Charles Schwab and Fidelity National Information Services, Inc. (NYSE:FIS), both top detractors for the quarter. Banking software provider FIS’s shares were also collateral damage as investors looked to shed any exposure to the small and regional banks that FIS serves. This, after several quarters of underwhelming operating results, lands FIS as our top detractor for the fiscal year period as well. Our FIS experience has been disappointing to be sure. But having re-underwritten our investment thesis and lowered our business value estimate, we believe investors have exacted too steep a penalty on FIS shares. From this lowered price, we are optimistic that new management can reestablish credibility with investors and unlock value through the planned separation of the banking software and merchant services businesses.”

Like Alibaba Group Holding Limited (NYSE:BABA), The Walt Disney Company (NYSE:DIS), and Paypal Holdings, Inc. (NASDAQ:PYPL), Fidelity National Information Services, Inc. (NYSE:FIS) is a stock that many elite hedge funds are piling into this year.

7. Wells Fargo & Company (NYSE:WFC)

Two-year performance: -3.41%

Number of Hedge Fund Holders: 78

Sciencast Management held the most shares in Wells Fargo & Company (NYSE:WFC) at the end of the first quarter, holding 11,900 shares in the company.

Wells Fargo & Company (NYSE:WFC) is a diversified banking company. It is based in San Francisco, California.

In total, 78 hedge funds were long Wells Fargo & Company (NYSE:WFC) during the first quarter. Their total stake value was $4.2 billion.

Ken Usdin at Jefferies has a Hold rating on Wells Fargo & Company (NYSE:WFC) shares as of July 11, alongside a $45 price target.

6. Citigroup Inc. (NYSE:C)

Two-year performance: -31.6%

Number of Hedge Fund Holders: 79

Citigroup Inc. (NYSE:C) is another diversified banking company on our list. It is based in New York.

At the end of the first quarter, 79 hedge funds held stakes in Citigroup Inc. (NYSE:C). Their total stake value was $7.7 billion.

Jefferies analyst Ken Usdin maintains a Hold rating on Citigroup Inc. (NYSE:C) shares as of July 11. He also has a price target of $46 on the shares.

Click to continue reading and see the 5 Out of Favor Stocks That Hedge Funds Love.

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Published on May 1, 2024 at by Inan Dogan, PhD

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Published on May 2, 2024 at by Insider Monkey Staff

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