One of our many regular quarterly features at Insider Monkey is to present a series of articles detailing groups of stocks which saw large increases or decreases in the hedge fund ownership of their shares during a period of time. In addition to articles focused on breaking down stocks by market cap or sector, we also do articles that include all stocks and the absolute biggest sentiment shifts among hedge funds. We’ve already covered the five stocks that hedge funds were buying the most during the second quarter, so in this feature we’ll examine five stocks at the opposite end of the sentiment spectrum, the stocks hedge funds most sold out of.
First, let’s take a glance back at the stocks which hedge funds fled during the first quarter and see how they performed during the second quarter. Those stocks were Citizens Financial Group Inc (NYSE:CFG), eBay Inc (NASDAQ:EBAY), EOG Resources Inc (NYSE:EOG), General Motors Company (NYSE:GM), and Sunedison Inc (OTCMKTS:SUNEQ). Only one of those stocks, EOG, posted gains during the second quarter (of 14.94%), while the other four were all down. SunEdison fared the worst, losing 42.47% before trading of the company’s shares was suspended after April 21. All told, the five stocks delivered losses of 8.80% on average during the quarter, so it appears that the hedge fund sentiment was useful in locating stocks poised for underperformance.
With that in mind, let’s take a look at a new list of five stocks that hedge funds were fleeing during the most recent quarter. They are Yahoo! Inc. (NASDAQ:YHOO), McDonald’s Corporation (NYSE:MCD), Pfizer Inc. (NYSE:PFE), Apple Inc. (NASDAQ:AAPL), and Allergan PLC (NYSE:AGN).
Through extensive research that covered the portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).
Yahoo! Inc. (NASDAQ:YHOO)
– Number of Hedge Funds With Long Positions (as of June 30): 81
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $6.77 billion
First up is Yahoo, the hedge fund ownership of which slid to 81 from 97 quarter-over-quarter among the funds in our database. Brian Taylor’s Pine River Capital, James Dondero’s Highland Capital, and Howard Marks’ Oaktree Capital were among the many hedge funds that sold off their Yahoo positions during the quarter.
It’s somewhat surprising to see the smart money run from Yahoo! Inc. (NASDAQ:YHOO) in the second quarter given its efforts to sell its core business, providing potential value to investors as both an Alibaba Group Holding Ltd (NYSE:BABA) tracking stock of sorts, in addition to the potential benefits of the divestiture of Yahoo’s core business (which ended up being sold to Verizon Communications Inc. (NYSE:VZ) at the end of July). Yahoo’s shares have gained over 13% in the third quarter thanks to a similar run-up in Alibaba’s stock.
McDonald’s Corporation (NYSE:MCD)
– Number of Hedge Funds With Long Positions (as of June 30): 63
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $3.03 billion
McDonald’s was held in the portfolios of 63 hedge funds in our system on June 30, down from 83 a quarter earlier. A few investors who weren’t “lovin’ it” (it being McDonald’s stock, which they sold off) during the second quarter were Jacob Gottlieb‘s Visium Asset Management, John Burbank’s Passport Capital, and Clint Carlson’s Carlson Capital.
With McDonald’s Corporation (NYSE:MCD) pushing all-time highs, it’s less surprising to see hedge funds grow cautious of the fast-food giant’s valuation. Its trailing P/E has ballooned to 23, from a three-year average of just 17 in the years prior to 2015, and revenue is falling. And while McDonald’s has considerably hiked its dividend in recent years, it’s done so by racking up mounds of debt where there was previously little. On the plus side, McDonald’s Corporation’s profitability should improve in the years to come as it continues the process of refranchising the majority of its restaurants.
Three more stocks that lost loads of smart money support during the second quarter are discussed on the next page.
Pfizer Inc. (NYSE:PFE)
– Number of Hedge Funds With Long Positions (as of June 30): 94
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $5.67 billion
Pfizer fell from being the seventh-most popular stock among the hedge funds that we track on March 31, to the 14th-most popular one on June 30. A net total of 25 hedge funds vacated the stock during the second quarter, including Barry Rosenstein’s JANA Partners, which sold off a position that contained 13.46 million shares on March 31. Jason Karp’s Tourbillon Capital sold off its 7.00 million-share position during the quarter, while Arthur B. Cohen and Joseph Healey’s Healthcor Management sold off its 1.60 million-share holding.
Pfizer Inc. (NYSE:PFE)’s inclusion on this list (and that of Allergan’s below) aren’t total shocks, as merger arbitrage funds gobbled them up in preparation of what would have been a monolithic merger between the two. As fate would have it, that merger was scuttled early in the second quarter and many of those hedge funds groaned and sold off their stakes. Pfizer recently rewarded itself with a small consolation prize in the form of Medivation Inc (NASDAQ:MDVN), purchasing the cancer drug developer for $14 billion. However, the market groaned again, this time at the price tag, and sold off their Pfizer shares, which have drifted down by 5% in August.
Apple Inc. (NASDAQ:AAPL)
– Number of Hedge Funds With Long Positions (as of June 30): 116
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $10.68 billion
Apple witnessed a gigantic fall in hedge fund popularity during the second quarter, as there was a net total of 36 fewer hedge funds long the tech giant on June 30 than there were on March 31, when Apple was the fourth-most popular stock overall (it’s now fallen to eighth). Michael Burry‘s Scion Asset Management, Leon Cooperman’s Omega Advisors, and John Griffin’s Blue Ridge Capital were among the prominent investors in our database who sold off Apple holdings during the second quarter.
Hedge funds were likely spooked by Apple Inc. (NASDAQ:AAPL)’s first quarter earnings report, which showed its first sales decline in over a decade. Carl Icahn, who also sold off Apple during the quarter, cited concerns about China’s growth as a reason for abandoning the stock. Indeed, Apple has had a rough go of it in China recently, as sales and market share have crumbled in the face of cheaper local options.
Allergan PLC (NYSE:AGN)
– Number of Hedge Funds With Long Positions (as of June 30): 131
– Aggregate Value of Hedge Funds’ Holdings (as of June 30): $13.91 billion
Hedge fund darling Allergan, which ranked as the second-most popular stock among hedge funds a quarter ago, experienced a large dip in sentiment during the second quarter. From being held in the portfolios of 170 of the investors in our system on March 31, Allergan’s total dipped to 131 as of June 30, which dropped it to fifth in terms of popularity. James Flynn’s Deerfield Management, Ken Griffin’s Citadel Investment Group, and David Einhorn’s Greenlight Capital were just a few of the hedge funds that closed Allergan positions during the quarter.
As mentioned, the failed Allergan PLC (NYSE:AGN)/Pfizer lockup likely explains the huge dip in the ownership of both companies among hedge funds. Allergan recently made a much lower-key acquisition than Pfizer’s, snatching up private biotech company ForSight Vision5 for an upfront payment of $95 million as well as a milestone payment should the biotech’s glaucoma treatment receive FDA approval. The small acquisition is in keeping with Allergan CEO Brent Saunders’ comments during the company’s second quarter earnings call, in which he stated that Allergan would look for deals that would act as “stepping stones”, rather than making a big splash. It had been rumored that Allergan would make a play for $69 billion Biogen Inc (NASDAQ:BIIB), which Mr. Saunders shot down during the call.