Bill Ackman‘s huge losses in Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Greenlight Capital’s almost 20% loss, and Larry Robbins’ 13.5% loss through the end of September gave trigger-happy journalists more ammunition to bash hedge funds. We criticize hedge funds for their high fees and increasing exposure to the S&P 500 Index. However, on average, hedge fund managers are still great at picking individual stocks. We will demonstrate this in a series of articles. In this article I will take a look at the performance of the five stocks hedge funds dumped the most during the second quarter. I will reveal the average performance of these five stocks at the end of this article (you can try to guess it now).
5. Twitter Inc (NYSE:TWTR)
– Number of hedge funds with bullish Twitter positions at the end of Q1: 64
– Number of hedge funds with bullish Twitter positions at the end of Q2: 47
– Return since June 30th: -19.5%
First up on our list is Twitter Inc (NYSE:TWTR). The $20 billion social media giant ranked as the fifth-most dumped stock, as a net total of 17 hedge funds vacated it during the second quarter. John Thaler sold out of the biggest hedge fund position in Twitter because he shut down his hedge fund. Funds run by billionaire managers, including OZ Management, Point72 Asset Management, and Tiger Global sold out of their positions as well. While every hedge fund may have had a different reason to sell Twitter Inc (NYSE:TWTR), here is how Barac Capital explained its action in its second quarter investor letter:
“Twitter was one of the worst performers for the quarter (after being one of the best performers last quarter). Though Twitter is a small position for the Fund, the holding warrants some explanation as it is not the type of stock (i.e. speculative with substantial growth priced in) typically targeted by the Partnership. The Fund bought shares of Twitter in May of 2014 after the shares had declined by over 50%. At that point, the company’s valuation had fallen such that I viewed a small position as an attractively priced option on the company’s ability to monetize their user base and/or realize takeover upside. In less than a year after the purchase, the stock price increased over 50% and I became less comfortable with the risk/reward dynamics of the shares (thus, selling a third of the shares at a considerable profit in April of 2015). Tax considerations temporarily prevented me from selling more (i.e. the position was still a shortterm unrealized capital gain) and this proved unfortunate (at least, in the short-term). Less than a month after selling the partial position, the stock fell by around 30% following a disappointing earnings report. I viewed this particular earnings-related sell-off as an overreaction and (again) believed that risk/reward was attractive and I increased the holding commensurately (to the level that the Fund owns today).”
In that vein, it will be interesting to see how hedge funds collectively played the stock in the third quarter, which we’ll know by the end of the current 13F filing period. Did they find Twitter’s depressed valuation an attractive re-entry point, or was the company’s sluggish user growth seen as too large a detriment for the stock to overcome in the near-term? What we do know is that many of the elite hedge funds tracked by Insider Monkey timed their exits well, sparing themselves from Twitter’s second-half losses.
On the next page we check in on a solar stock that hedge funds very wisely ditched in the second quarter.