Hedge Funds Must Regret Having Sold Off These 5 Stocks: from Apple Inc. (AAPL) to Valeant Pharmaceuticals Inc. (VRX)

Major U.S. stock indexes had a relatively good third quarter, with the Dow Jones up by almost 2.9%, while the S&P 500 and NASDAQ Composite gaining about 4% and 11%, respectively. Meanwhile a number of stocks showed more significant gains than the broader market and, in this article, we will take a look at five stocks that appreciated during the third quarter, but at the same time registered a reduction in support from smart money investors a quarter earlier.

At Insider Monkey, we track around 740 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

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Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

– Number of Hedge Funds Long The Stock As Of March 31: 71

– Number of Hedge Funds Long The Stock As Of June 30: 60

– Value of Hedge Funds’ Combined Holdings As Of June 30: $2.11 billion

We’ll start with Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which witnessed a 15.4% reduction in the number of funds in our database long its stock during the second quarter. Among those that left were Jason Karp’s Tourbillon Capital Partners, which sold all of its 3.41 million shares and David Tepper’s Appaloosa LP, which disposed of 945,000 shares. Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s stock, which had lost more than 80% of its value in the first half of the year, managed to recuperate around 30% in the third quarter. Recently, Citron Research’s executive editor Andrew Left explained why the company would take a hit if either Donald Trump or Hillary Clinton are elected as the next U.S. president. “Regulating the price of pharmaceuticals and eliminating price gouging might be the only issue that Trump and Hillary both agree on,” he said in an article published on The Street’s “Real Money.”

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Yahoo! Inc. (NASDAQ:YHOO)

– Number of Hedge Funds Long The Stock As Of March 31: 97

– Number of Hedge Funds Long The Stock As Of June 30: 81

– Value of Hedge Funds’ Combined Holdings As Of June 30: $6.76 billion

Next up is Yahoo! Inc. (NASDAQ:YHOO), in which the number of funds holding shares slid by 16.5% during the second quarter. Defectors included Howard Marks’ Oaktree Capital Management, which sold all of its 11.68 million bonds and its 423,626 shares, and Didric Cederholm’s Lion Point Capital, which closed its stake that had contained 2.32 million shares on Mach 31. Yahoo! Inc. (NASDAQ:YHOO) had a decent first half of 2016, with its stock gaining more than 12.9%. However, the third quarter was even stronger, with shares spiking by more than 18.25%, even though a recent data breach that affected about half a billion accounts could put its $4.8 deal Verizon Communications Inc. (NYSE:VZ) at risk, as many analysts have argued.

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Alphabet Inc (NASDAQ:GOOGL)

– Number of Hedge Funds Long The Stock As Of March 31: 155

– Number of Hedge Funds Long The Stock As Of June 30: 135

– Value of Hedge Funds’ Combined Holdings As Of June 30: $11.55 billion

Although it might come across as a surprise, hedge funds fled Alphabet Inc (NASDAQ:GOOGL) between April and June. After a 12.9% reduction in the number of funds long the stock, the company counted 135 investors hoolding class A shares, including Harris Associates, which declared holding 631,571 Class A shares and 2.18 million Class C shares as of the end of June. On the other hand, two of the most bearish firms were Ken Griffin’s Citadel Advisors and Steve Cohen’s Point72 Asset Management, which sold their stakes. Alphabet Inc (NASDAQ:GOOGL) had a volatile first half of 2016, ultimately losing more than 9.5%. Over the third quarter, however, shares advanced by 16.25%, taking year-to-date returns to 4%. Last week, analysts at Wedbush downgraded the stock to ‘Underperform’ from ‘Neutral’ and cut their price target to $700 from $800, citing a probably prompt arising of four major issues: “self-identified consumers, consumer control of IP-delivered ads, payments innovation, and attention markets.”

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Facebook Inc (NASDAQ:FB)

– Number of Hedge Funds Long The Stock As Of March 31: 164

– Number of Hedge Funds Long The Stock As Of June 30: 148

– Value of Hedge Funds’ Combined Holdings As Of June 30: $15.24 billion

Another surprising inclusion in this list is Facebook Inc (NASDAQ:FB), in which the number of bullish investors from our database slid by 16 during the second quarter. Notable departures included Appaloosa LP, which disposed of 1.62 million shares over the quarter, and George Soros’ Soros Fund Management, which unloaded its stake of 442,696 shares.Facebook Inc (NASDAQ:FB) has had a great year, with its stock up by 24% year-to-date. And, while Soros, Appaloosa, and other funds that left reaped returns of almost 9.2% in the first half of 2016, they missed out on the 13.2% surge seen in the third quarter. The stock came under pressure recently after the company disclosed that it had unintentionally overestimated the average time users watched videos on its platforms for approximately two years. Although the inflated data did not impact billing, advertisers are not happy with the 60% to 80% overestimation.

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Apple Inc. (NASDAQ:AAPL)

– Number of Hedge Funds Long The Stock As Of March 31: 152

– Number of Hedge Funds Long The Stock As Of June 30: 116

– Value of Hedge Funds’ Combined Holdings As Of June 30: $10.67 billion

Finally, there’s Apple Inc. (NASDAQ:AAPL), which saw the number of funds in our database long its stock drop by more than 23%. Deserters included Alex Snow’s Lansdowne Partners, which unloaded all of its 4.34 million shares over the second quarter, and John Griffin’s Blue Ridge Capital, which sold 1.94 million shares between April and June.

Apple Inc. (NASDAQ:AAPL)’s stock lost 9% over the first six months of 2016, but during the third quarter it rebounded by 21%. The tech behemoth has been in the news every day recently. Last week, the stock was in the spotlight after Digitimes reported that the company has boosted parts orders for iPhone 7 devices, adding that order visibility for the fourth quarter is 20% to 30% higher than they had anticipated.

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Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.