Five Foreign Stocks Hedge Funds Love

The easiest way to reduce a portfolio’s exposure to local factors, which could both be macroeconomic or industry specific, is to invest in foreign companies listed on local exchanges. In order to help retail investors with this diversification we have jotted down a list of five foreign companies that are very popular among the smart money investors in our database, based on the previous round of 13F filings.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests during the 1999-2012 period (see the details here).

#5 JD.Com Inc(ADR) (NASDAQ:JD)

Investors with Long Positions (as of September 30): 71

Aggregate Value of Investors’ Holdings (as of September 30): $9.10 Billion

While the total number of hedge funds, among those that we track, with shares of JD.Com Inc(ADR) (NASDAQ:JD) in their portfolios dropped by four during the third quarter the aggregate value of their holdings declined by $270 million. Nevertheless, the stock was fairly popular among the investors in our database and they have been rewarded with gains north of 30% registered by JD’s stock during the fourth quarter. However, as the market became more concerned about the growth of the Chinese economy and its impact on consumption, most Chinese stocks retracted since the beginning of the year and JD’s shares have lost some 29% year-to-date.

 JD.com has not reported its financial results for the last quarter yet, but analysts currently expect a loss of $0.12 per share on revenue of $51.95 billion, which represents a 49% growth on the year. However, the latest results of JD’s rival in the Chinese e-commerce space Alibaba Group Holding Ltd (NYSE:BABA), showed a slowdown in the gross merchandise value growth, which might be bad news for JD. Nevertheless, analysts remain optimistic on the stock’s prospects and earlier this year, Jefferies Group and MKM Partners reiterated ‘Buy’ ratings, while Nomura upgraded the stock to ‘Buy’ from ‘Neutral’ and raised the price target to $35 from $27. In the current round of 13F filings, Richard Driehaus’ Driehaus Capital reported a new position in JD.com, which contains 741,655 shares.

#4 AerCap Holdings N.V. (NYSE:AER)

Investors with Long Positions (as of September 30): 77

Aggregate Value of Investors’ Holdings (as of September 30): $2.99 Billion

The Netherlands-based $5.3 billion aircraft leasing company has seen its stock price lose some 30% since the end of September, as it has been mainly affected by a 39% drop registered since the beginning of 2016. The year-to-date decline came mainly amid the broader market correction, since there haven’t been any particular events that affected the company. The turmoil in China also played an important role in the correction of the AerCap’s stock, since the emerging markets in Asia represent important markets for the aircraft leasing companies.

However, there might be a high chance that the correction was a bit of an overreaction, since AerCap maintains a strong balance sheet and has commitments to purchase 458 new aircrafts through 2022 (as of September 30). At the same time, at 4.1 forward price-to-earnings multiple, the stock is very attractive following the correction. Among the funds we follow, at the end of 2015, Wexford Capital held 345,730 shares of AerCap, according to its latest 13F filing.

 

#3 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

Investors with Long Positions (as of September 30): 88

Aggregate Value of Investors’ Holdings (as of September 30): $17.7 Billion

Valeant has been a relatively controversed stock lately. On the one hand, it has dropped by 47% since the end of September, amid several events related to drug-pricing policies and management changes. However, at the same time, some notorious investors reiterated their confidence in the company. Among others, Bill Ackman has been buying shares in the last couple of months and according to Pershing Square’s latest 13D filing, the activist owns some 30.71 million shares, which represent 9% of Valeant’s outstanding common stock and compares with 19.47 million shares it disclosed in its 13F filing for the end of the third quarter. In his last investor letter, Bill Ackman said:

“There are a number of relatively short-term catalysts that we believe may lift the overhang on Valeant shares. We expect that this morning’s announcement will reduce if not eliminate concerns about disruptions in the distribution of Valeant’s dermatology products. […] The company will likely file its 10-K in February with the results of Price Waterhouse’s year-end audit. This should comfort investors who have concerns about Valeant’s accounting. While we expect a messy fourth quarter due to the shutdown of Philidor and investigative costs, the company should be able to post “clean” quarters beginning in the second quarter of next year. With the passage of time, the reduction in uncertainty, increased transparency, the reporting of operating results which we anticipate to be strong, along with the deleveraging of the balance sheet, we expect Valeant stock to rise substantially.”

#2 Liberty Global plc – Class C Ordinary Shares (NASDAQ:LBTYK)

Investors with Long Positions (as of September 30): 89

Aggregate Value of Investors’ Holdings (as of September 30): $8.28 Billion

The total number of hedge funds with long positions in Liberty Global plc – Class C Ordinary Shares (NASDAQ:LBTYK) inched up by one during the third quarter, while the aggregate value of their holdings slid by 14% during the third quarter. Since the end of September, the stock slid by more than 25% amid the broader market sell-off and investors’ growing concerns about the cost-cutting trend that has started recently. Nevertheless, smart money investors seem to be bullish on Liberty Global plc, and among the funds we track, the sentiment has been steady with 89 funds holding some 23% of the stock at the end of September. In the current round of 13F filings, Lou Simpson’s SQ Advisors reported holding nearly 8.31 million shares of Liberty Global plc – Class C Ordinary Shares (NASDAQ:LBTYK) as of the end of December.

 

#1 Allergan plc Ordinary Shares (NYSE:AGN)

Investors with Long Positions (as of September 30): 151

Aggregate Value of Investors’ Holdings (as of September 30): $20.47 Billion

The number of funds with long positions in the Dublin-based pharmaceutical company remained unchanged during the third quarter and it ranked as the most popular stock among the funds we track. In the fourth quarter of 2015, the stock gained some 25% as Allergan plc Ordinary Shares (NYSE:AGN) entered into an acquisition agreement with Pfizer. The deal, valued at around $160 billion will create the world’s largest drugmaker in terms of sales. However, since the beginning of the year, the stock slid by 12% amid a broader market decline. One of the largest investors in Allergan at the end of the third quarter was Barry Rosenstein‘s JANA Partners, which held 1.89 million shares, according to its last 13F filing. In a recent investor letter, Rosenstein said:

“We first invested in Allergan (through its predecessor Actavis) in November 2013. Since then, we have watched the company increase per share value through three transformative transactions: the acquisition of Forest Laboratories Inc. (announced February 2014), the acquisition of Allergan, Inc. (announced November 2014), and in July, the announced sale of its generics franchise to Teva Pharmaceutical Industries, Ltd. (TEVA), which we expect to close in the first quarter of 2016. When the TEVA transaction closes, the new Allergan will be a branded pharmaceutical company with six key therapeutic areas and $15 billion of revenues, expected to grow its top line at low double digits and earnings per share at 20 percent per annum. It will also have close to zero net leverage when adjusted for the proceeds from TEVA. The AGN of tomorrow looks nothing like the small generic company of Watson Pharmaceuticals Inc. that Paul Bisaro took the helm of in 2007.”

Disclosure: None