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).
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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.
4. SunPower (NASDAQ:SPWR)
– Number of hedge funds with bullish SunPower positions at the end of Q1: 35
– Number of hedge funds with bullish SunPower positions at the end of Q2: 17
– Return since June 30th: -16.0%
Solar stocks and their yieldcos are getting whacked left-and-right. Famed short seller Jim Chanos is targeting SolarCity Corp (NASDAQ:SCTY). Sunedison Inc (NYSE:SUNE) has lost a monumental 75% of its value since July. And SolarCity Corp (NASDAQ:SCTY), despite being the best performer in the industry, is well off its highs from earlier this year. In the middle of that ugly scene is SunPower (NASDAQ:SPWR), which could formerly claim the title of building the most efficient solar panels in the industry, at 21.5% on the high end. However, that title was recently claimed by the aforementioned SolarCity Corp (NASDAQ:SCTY), a much more popular stock among the investors we track. 34 of those investors held 24.60% of SolarCity’s shares, while 17 investors held just 3.10% of SunPower (NASDAQ:SPWR)’s shares after they fled the stock in the second quarter. Despite shares only declining by about 9% during the second quarter, the aggregate value of hedge funds’ holdings fell by nearly 50% as they yanked capital out of the stock.
The good news for solar stocks is that the worst may now be behind them, which could lead to smart money investors heading back into them for a fourth quarter rally. We recommended buying solar stocks at the end of September, when many of them were at rock-bottom prices, and since then SunPower has gained over 30%, SunEdison is up by more than 11%, and First Solar, Inc. (NASDAQ:FSLR) has gained more than 23%. We’ll be watching for the smart money sentiment on SunPower to see if they timed their re-entries as well as they did their exits. Israel Englander and John Murphy each sold off positions in SunPower formerly worth over $10 million during the second quarter.
Another social media company was being cast off by elite money managers in the second quarter. Find out which one on the next page.
3. LinkedIn Corp (NYSE:LNKD)
– Number of hedge funds with bullish LinkedIn positions at the end of Q1: 60
– Number of hedge funds with bullish LinkedIn positions at the end of Q2: 42
– Return since June 30th: -3.0%
LinkedIn Corp (NYSE:LNKD) has been the best performing stock since June 30 among the five featured in this article, though it has nonetheless registered a loss during that time. The professional networking site lost a lot of support in the second quarter after it lowered its guidance for the remainder of the year when announcing its first quarter results on May 1. Namely, earnings guidance was set at a paltry adjusted EPS of $1.90, while the market had been anticipating earnings of $3.03 for the year. It’s easy to see why elite investors headed for the exits. While LinkedIn is continuing to grow revenue at a solid pace, expenses are growing in lock-step with that revenue growth, pinching any growth potential in earnings. The company is free-cash-flow negative in the amount of $180 million over the trailing 12 months, and has a 12-month forward P/E of just under 60.
While masterful investors Steve Cohen and George Soros both maintained prominent positions in Facebook Inc (NASDAQ:FB), they were two of the investors to close their LinkedIn Corp (NYSE:LNKD) positions during the second quarter. Cohen’s former position had been 193,100 shares-strong, while Soros’ LinkedIn holding had consisted of 13,000 shares.
While still a popular stock among the investors we follow, there was a noticeable decline in sentiment for this chipmaker they abandoned during the second quarter. See which one it was on the next page.
2. Micron Technology, Inc. (NASDAQ:MU)
– Number of hedge funds with bullish Micron positions at the end of Q1: 100
– Number of hedge funds with bullish Micron positions at the end of Q2: 79
– Return since June 30th: -11.3%
If anyone thought Micron Technology, Inc. (NASDAQ:MU) had hit rock-bottom during the second quarter, they were wrong. Smart money sentiment wasn’t convinced that it had, as a net 21 funds said adios to the chipmaker’s shares by the end of the quarter. However, the funds in our database did still hold 18.30% of Micron’s shares led by billionaire David Einhorn, who added shares to his holding during the quarter, lifting his stake by 14% to 37.95 million shares. However, in Einhorn’s third quarter letter to investors, he expressed bearish sentiment towards both its short and long-term prospects, revealing that his substantial position had since been reduced by an unspecified amount.
Einhorn’s views on Micron from the Q3 letter:
“Our thesis has been that MU’s primary product, DRAM, has consolidated to three players, who are likely to create more industry profits compared to when DRAM production was highly fragmented. The problem is that structural industry improvement doesn’t make DRAM less cyclical. The large capital requirements force participants to make large investments in anticipation of future demand. If the industry overestimates demand, it still makes sense to operate at full capacity and oversupply ensues. This year, demand came up short, DRAM prices collapsed, and despite our concerns about PC demand, we missed the turn of the cycle. Those PC demand worries led us to sell LAM Research and Marvell Technology at good prices prior to a sell-off in each security and we shorted (and subsequently covered) Best Buy, IBM and Intel. Although all of these moves helped, we underestimated the extent of MU’s exposure to the PC demand shortfall.
MU’s other business is flash memory or NAND. We anticipated a significant recovery in NAND this year that failed to materialize. MU is set to earn far less than we expected, and earnings will remain low until supply and demand come into balance. Two other problems with our thesis have emerged. First, the Chinese have expressed interest in getting into DRAM. Our prior view was that the consolidated industry would not face new entrants. While the Chinese threat is distant, we judge it relevant. Second, MU announced a much more aggressive capital spending plan for NAND than we envisioned. While management believes that the extra investment will generate adequate returns, we are unconvinced. With separate problems clouding both the short-term and long-term, we determined that there is enough risk to the thesis to reduce the position.”
Needless to say, when one of a company’s staunchest supporters, who’s held a large position in the stock for about two years begins to back out of it and expresses a lot of concerns over even its long-term prospects, that’s certainly cause for concern. Billionaire Seth Klarman appears to have anticipated Micron Technology, Inc. (NASDAQ:MU)’s woes sooner than Einhorn, having reduced his own substantial position in the stock by 62% during the fourth quarter of 2014. Since the start of the year Micron has shed over 50% of its value.
Without a doubt the best case for monitoring hedge fund activity can be found in the stock the smart money most dumped during the second quarter. See what it was on the final page.
1. Citizens Financial Group Inc (NYSE:CFG)
– Number of hedge funds with bullish CFG positions at the end of Q1: 76
– Number of hedge funds with bullish CFG positions at the end of Q2: 38
– Return since June 30th: -15.9%
As mentioned, Citizens Financial Group is a shining example of how valuable elite hedge fund sentiment can be. The previous filing period was the second-straight one in which Citizens Financial Group Inc (NYSE:CFG) experienced a massive swing in sentiment among the investors that we follow, moves which perfectly foreshadowed the resultant performance of the stock over the following quarter. In the first quarter, Citizens Financial Group was a darling of the investors we track, who bought the stock in droves, as a net 46 investors added holdings of the stock to their portfolios during the quarter, far more than any other stock. The stock responded with gains of over 13% during the second quarter.
Yet as we now see, in the span of one quarter Citizens Financial Group Inc (NYSE:CFG) went from the stock funds bought the most, to the one they sold the most, and hedge funds timed their buying and selling perfectly, as shares gave back all of their second quarter gains and then some during the third quarter. Brian Jackelow’s SAB Capital Management pulled this fast entrance and exit off to perfection, opening a 6.5 million-share position in the first quarter, making the stock his top pick as of March 31, and selling it off lock, stock, and barrel in the second quarter. We’ll soon see if hedge funds re-entered the stock once it dipped down to the levels at which they first bought it during the first quarter.
Overall these five stocks that hedge funds dumped the most lost an average of 13.1% between June 30th and October 22nd. S&P 500 Index ETFs returned about 0.2% during the same period. So, hedge funds that were quick on their feet actually avoided a negative alpha of 13.3 percentage points in less than four months.
Disclosure: None
