Shares of Costco Wholesale Corporation (NASDAQ:COST), American Express Company (NYSE:AXP), Paypal Holdings Inc (NASDAQ:PYPL), and Macy’s, Inc. (NYSE:M) are trending after various investment banks changed their ratings on the equities. Let’s take a closer look at why the banks changed their ratings and analyze relevant hedge fund sentiment toward the stocks.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Costco Wholesale Corporation (NASDAQ:COST) is trending after the analysts at UBS upgraded the retailer to ‘Buy’ from ‘Neutral’, and assigned the stock a $180 price target. UBS likes how the retailer is charging higher membership fees and switching to Visa from American Express. The increased membership fees and the credit card switch will boost Costco’s bottom line. Given Costco’s customers are generally more affluent than other big store customers, Costco will not lose many customers from raising prices. The smart money is bullish on Costco Wholesale Corporation (NASDAQ:COST). Of the elite 730 funds we track, 44 funds owned $1.54 billion worth of the company’s outstanding stock (representing 2.60% of the float) on June 30, versus 41 funds and $1.51 billion respectively a quarter earlier. Among them, Billionaire Warren Buffett‘s Berkshire Hathaway kept its position the same at 4.33 million shares, while Richard Chilton’s Chilton Investment Company increased its stake by 32% to 722,162 shares.
American Express Company (NYSE:AXP) is down by 0.86% in morning trade after UBS downgraded the premium credit card company to ‘Sell’ from ‘Neutral’ and lowered their price target to $67 from $81. The analysts at UBS don’t think American Express can achieve its long term guidance of around 12-15% EPS growth ‘any time in the next several years’. The analysts also expect American Express to lose 8% of its card members and 18% of its card portfolio following Costco’s decision to switch to Visa instead of using American Express. The smart money is still bullish, however. 57 funds owned $15.84 billion of the company’s shares (representing 20.10% of the float) on June 30, versus 65 funds and $15.62 billion respectively on March 31. Warren Buffett’s Berkshire Hathaway owned 151.61 million at the end of June. American Express Company’s big buybacks should provide some support if the stock falls far enough.
On the next page, we examine why Paypal and Macy’s are trending.
Paypal Holdings Inc (NASDAQ:PYPL) has advanced by 2.34% after Goldman put the online payments company in its ‘Conviction Buy’ list. The company Elon Musk co-founded is now fully independent, having spun off from eBay Inc (NASDAQ:EBAY) in July. With the right M&A and investment in R&D, Paypal Holdings Inc (NASDAQ:PYPL) could justify its forward P/E of 23.56 and then some. With more and more people connected to the internet every year, online finance still has plenty of room to grow. Horseman Capital is bullish, as Paypal is a new position for the fund in the third quarter. The fund has a stake of 400,700 shares as of September 30.
Macy’s, Inc. (NYSE:M) is down 1.52% after the analysts at Cowen & Company lowered their rating on the retailer to ‘Market Perform’ from ‘Outperform’. The downgrade could be a precaution after J C Penney Company Inc (NYSE:JCP)’s stock fell 10% in the last two trading sessions. Although Macy’s might benefit from J C Penney Company doing less business as a competitor, Macy’s is worth less if J C Penney is worth less based on relative valuations. Shares are down by 25.84% year-to-date, but trade at an attractive forward P/E of 10.15 and dividend yield of 3%. David Einhorn’s Greenlight Capital owned 1.02 million shares of Macy’s at the end of June.