Many hedge funds lost money in the third quarter, as low crude prices, a weak economic environment in China, and uncertainty regarding the Fed’s move to raise interest rates sent the major indices into correction territory. Nevertheless, smart money investors decided to stick to their top picks, betting that these companies’ strong fundamentals will help them quickly regain any lost ground. At Insider Monkey we follow more than 700 hedge funds and other institutional investors. As all of them have filed their 13F’s for the end of the third quarter, we have analyzed their equity portfolios and compiled the list of the most popular stocks among these funds. In this article, we are going to take a look at the five companies that head the list. When you’re done reading this list, be sure to check out part II, where we analyze their 6th-to-10th ranked stock picks.
We believe that the smart money sentiment represents an important metric while assessing the long-term potential of a stock. Hedge funds and other large money managers spend a lot of resources and conduct a very detailed analysis while choosing their next pick. They often focus on long-term gains, which makes them the perfect investors to emulate. Our strategy involves the most popular small-cap stocks among the funds from our database and it has returned 102% since August 2012, versus a 49% gain for the S&P 500 ETF (SPY) (see more details here).
The first two spots on our list of the most popular stocks are still represented by Allergan PLC (NYSE:AGN) and Apple Inc. (NASDAQ:AAPL). Both stocks fell by around 11% in the third quarter, but investors stuck to their holdings in Allergan, which had 151 funds holding its shares at the end of September, unchanged compared to the end of the previous quarter. On the other hand, Apple was less lucky, so to say, as the number of funds bullish on the company slid to 133 from 144 between July and September.
One of the reasons that drove the hedge fund sentiment towards Allergan is the fact that the stock’s decline in the third quarter was mainly caused by the overall drop of the market, rather than any particular developments in the company’s business. Allergan PLC (NYSE:AGN) announced the sale of its generics business to Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) in July, but smart money sees the transaction as a positive for Allergan, which should be able to focus on branded drugs with higher margins. And with the drop across the pharma industry, it should also be able to expand its portfolio at lower costs. Overall, the funds that were long Allergan PLC (NYSE:AGN) amassed $20.47 billion worth of stock at the end of September, compared to $20.73 billion a quarter earlier, which suggests that most investors profited from the decline to raise their exposure to the company. A more detailed look at the funds’ 13F filings supports this idea. The funds managed by Andreas Halvorsen, John Paulson, and Daniel Och are among the top shareholders of Allergan, and all three of them increased their stakes in the third quarter.
On the other hand, Apple Inc. (NASDAQ:AAPL) has been the target of concerns regarding its dependency on the iPhone and the economic situation in China made some investors question its sales in the region. However, Apple’s latest financial results disproved those concerns. Still, the investors from our database that disclosed long positions in Apple Inc. (NASDAQ:AAPL) in their latest 13F’s held $17.41 billion worth of stock, significantly down from the $21.27 billion worth of shares that the 144 funds long Apple at the end of June had amassed. Carl Icahn still remains one of Apple’s biggest fans, holding 52.76 million shares as of September 30.
On the next page, we will discuss the other three companies that the funds we track were collectively bullish on heading into the fourth quarter.