It has been a disastrous stretch for hedge funds in terms of investor retention. According to a report from Hedge Fund Research, investors pulled $28 billion from hedge funds during the last three months, the biggest quarterly money withdrawal since 2009. Total outflows for the year stood at $55.9 billion as of the end of July. Insider Trading scandals, high fees, and regulatory issues have plagued the beleaguered hedge fund community this year. Lackluster performance also remains an issue. The HFRI Fund Weighted Composite Index has gained 4.15% through the end of September, a better performance than last year, but still below the S&P 500’s gain of 6.08% through that period. Algorithmic trading, the Central Bank’s near-zero rate policy, and political and economic uncertainty at home and abroad are proving to be challenging for hedge funds to overcome. According to JP Morgan’s recent Flows & Liquidity report, hedge funds are also unloading stocks from their portfolios ahead of the U.S. presidential elections.
In this article, we’ll use the latest regulatory filings data to take a look at five companies whose shares were being sold off by the smart money investors tracked by Insider Monkey during the second quarter.
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).
Allergan plc Ordinary Shares (NYSE:AGN)
– Number of Hedge Fund Shareholders (as of June 30): 131
– Total Value of Hedge Funds’ Holdings (as of June 30): $13.91 billion
– Total Value of Hedge Funds’ Holdings (as of March 31): $20.11 billion
A net total of 39 hedge funds tracked by Insider Monkey dumped Allergan plc Ordinary Shares (NYSE:AGN)’s shares during the second quarter, while the value of their holdings plummeted by 30.8%, more than double the loss seen in the stock during the quarter. In April 2016, the U.S. government’s tax inversion changes led to Pfizer putting the kibosh on its $150 billion acquisition of Allergan, which lead to an investor exodus from both stocks, contributing to the declines. Investors also fear that if Hillary Clinton wins the election, that it will result in enhanced drug-pricing enforcement. Last month, Allergan announced the acquisition of Tobira Therapeutics Inc (NASDAQ:TBRA) for a surprising 500% premium. The company wants to get ahold of Tobira’s investigational medicine Cenicriviroc to enter the attractive market of on-alcoholic steatohepatitis, commonly referred to as NASH. Allergan plc Ordinary Shares (NYSE:AGN) will report its third quarter earnings on November 2.
Netflix, Inc. (NASDAQ:NFLX)
– Number of Hedge Fund Shareholders (as of June 30): 54
– Total Value of Hedge Funds’ Holdings (as of June 30): $3.73 billion
– Total Value of Hedge Funds’ Holdings (as of March 31): $6.67 billion
At the end of the second quarter, 54 funds in our system were bullish on Netflix, Inc. (NASDAQ:NFLX), down from 64 funds a quarter earlier, while the value of their holdings dropped by over 40% during the quarter, with Netflix’s shares falling by only 10% during that time. Netflix surprised investors in the third quarter after posting 3.57 million new subscriber additions for the period, handily beating the forecasts of 2.3 million net additions. Overall, the streaming company earned $0.12 per share on $2.29 billion in revenue for the quarter, beating the estimates of $0.06 in EPS on $2.28 billion in revenue. The company expects 5.2 million global net additions in the fourth quarter. That was a contrast to the second quarter, when Netflix reported disappointing growth and subscription numbers; its second quarter subscriber growth guidance, issued in April, is likely what lead hedge funds to yank their money. AT&T Inc. (NYSE:T)’s $80 billion buyout of Time Warner Inc (NYSE:TWX) is likely to affect Netflix in the long-term, as the new media behemoth is expected to transform HBO into a streaming giant and stop leasing content to Netflix. Netflix, Inc. (NASDAQ:NFLX)’s stock is up by 11.66% year-to-date.
On the next page we’ll discuss the selling activity around Lowe’s, McDonald’s, and Dow Chemical.
Lowe’s Companies, Inc. (NYSE:LOW)
– Number of Hedge Fund Shareholders (as of June 30): 67
– Total Value of Hedge Funds’ Holdings (as of June 30): $3.30 billion
– Total Value of Hedge Funds’ Holdings (as of March 31): $4.08 billion
A total of 67 hedge funds owned $3.30 million worth of Lowe’s Companies, Inc. (NYSE:LOW) shares at the end of the June quarter, compared to 64 funds which owned $4.07 million worth of the company’s stock a quarter earlier. The exodus of cash from the stock is despite it gaining over 5% during the second quarter. Many hedge funds appear to have timed their moves out of it well, as shares have declined by 13% since the end of June. The North Carolina-based retailer reported second quarter EPS of $1.37 on $18.26 billion in revenue on August 17, worse than the consensus analyst estimates of EPS of $1.41 on $18.3 billion in revenue. Comparable-sales grew by 2% in the quarter, half of the expected growth of 4.1%. For its full 2016 fiscal year, theLowe’s Companies, Inc. (NYSE:LOW)’s expects EPS of $4.06, inline with estimates. The stock has lost about 5.9% so far this year.
McDonald’s Corporation (NYSE:MCD)
– Number of Hedge Fund Shareholders (as of June 30): 63
– Total Value of Hedge Funds’ Holdings (as of June 30): $3.03 billion
– Total Value of Hedge Funds’ Holdings (as of March 31): $4.00 billion
No less than a net total of 20 hedge funds tracked by Insider Monkey dumped McDonald’s Corporation (NYSE:MCD) in the second quarter, while nearly $1 billion was yanked from the stock by the hedge funds in our database. Hedge funds got it right again in this case, as McDonald’s shares have continued to slide since the end of June, despite the company experiencing a rise in its global same-store sales during the third quarter. McDonald’s reported EPS of $1.50 on revenue of $6.42 billion, while the Street was expecting the fast food chain to earn $1.48 per share on $6.27 billion in revenue. Revenue was down by 3% compared to the same year-ago period however, due to the company’s refranchising efforts. The stock is down by 3.94% so far this year.
Can’t Miss: McDonald’s Corporation (NYSE:MCD’s inclusion on the list of the Top 10 Worst Marketing Campaigns Ever Produced.
Dow Chemical Co (NYSE:DOW)
– Number of Hedge Fund Shareholders (as of June 30): 48
– Total Value of Hedge Funds’ Holdings (as of June 30): $2.54 billion
– Total Value of Hedge Funds’ Holdings (as of March 31): $3.34 billion
As of the end of the second quarter, 48 hedge funds in our database owned $2.54 billion worth of Dow Chemical Co (NYSE:DOW)’s shares, while 44 funds had $3.34 billion shares of the company a quarter earlier. Last year, Dow Chemical Co and E I Du Pont De Nemours And Co (NYSE:DD) announced an all-stock merger of equals, which is expected to close before the end of the year. Given that, it’s not overly surprising to see hedge funds take some capital out of the stock. Dow Chemical Co (NYSE:DOW) earned $0.95 per share in the third quarter, beating the average analyst estimate of $0.85, while revenue of $12 billion was also above the forecasts of $11.24 billion. The stock is up by 5.30% so far this year.