The third quarter of 2015 was unarguably one of the most volatile periods for the equity markets in the last four years. While some stocks were beaten down aggressively during that period, others suffered only minor dents and scratches. However, there is a particular class of stocks from that period that we want to cover, and that is stocks which slumped hard during the third quarter, but didn’t see top investors lose much of their conviction for them. Since these companies lost a lot of their value since July, these stocks could make for bargain purchases. All five of the stocks on the following list witnessed a share decline of more than 25% during the July-to-September period, and have at least 70 hedge funds which we track at Insider Monkey owning a stake in them as of the end of September. Read further to know which stocks made it to this intriguing list.
#5 Kinder Morgan Inc (NYSE:KMI)
Investors with Long Positions (as of September 30): 72
Aggregate Value of Investors’ Holdings (as of September 30): $1.82 Billion
Although the stock of Kinder Morgan Inc (NYSE:KMI) declined by almost 27% during the third quarter and the aggregate value of the Kinder Morgan holdings among the investors that we track also saw a more than 25% drop during the same period, there was nonetheless a jump of eight in the number of investors long KMI. On a year-to-date basis, the energy infrastructure behemoth has lost more than half of its market capitalization. A part of those losses came on Monday, when the stock declined by 7.81% after it became clear that the company will bear the maximum brunt of the $171 million lawsuit that investors of an MLP filed against El Paso, a company that Kinder Morgan Inc (NYSE:KMI) acquired in 2014. Billionaire Daniel S. Och‘s OZ Management was one of the funds that increased its stake in the company during the third quarter; it held over 13.8 million shares of Kinder Morgan Inc as of September 30.
#4 Sunedison Inc (NYSE:SUNE)
Investors with Long Positions (as of September 30): 73
Aggregate Value of Investors’ Holdings (as of September 30): $1.06 Billion
Moving on, Sunedison Inc (NYSE:SUNE) is the stock in this list that not only suffered the harshest decline during the third quarter (down by 76%), but also suffered the largest drop in popularity among hedge funds during the same period. The number of hedge funds long SunEdison came down by 20 during the July-to-September period and the aggregate value of their holdings in it also dropped by a whopping 80% during the same period. The stock has continued its decline into the fourth quarter and is now trading down by almost 82% year-to-date. However, a large number of analysts that cover the stock are hugely bullish on it at current levels. On December 1, analysts at Credit Suisse reiterated their ‘Buy’ rating and $25 price target on it, which represents a potential upside of 600%. Kenneth Tropin‘s Graham Capital Management reduced its stake in the company by more than half, to 13 million shares during the third quarter.
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.