Below we take a look at why Hedge Funds Were Right About These 5 Sinking Stocks. For our methodology and a more comprehensive list, please see Hedge Funds Were Right About These 10 Sinking Stocks.
5. Sea Limited (NYSE:SE)
Number of Hedge Fund Shareholders: 77
Year-to-Date Returns: -66.1%
Kicking off the first half of the list is Sea Limited (NYSE:SE), which hedge funds began piling into in early 2019, just in time for the stock’s meteoric rise over the following two-and-a-half years. Hedge fund ownership of SE peaked along with the stock in the third quarter of 2021 and has cratered by 36% over the past two quarters.
Sea Limited (NYSE:SE) remains an intriguing long-term investment, boasting three high-growth, synergistic businesses in the form of gaming platform Garena, ecommerce platform Shopee, and digital payments platform SeaMoney, the latter of which grew revenue by 360% in Q1. There have been some cracks in its armor however, including a slowdown in Garena’s user base, which could have a trickledown effect to the other platforms and highlights the risk of basing a massive expansion project into other territories primarily on the strength of one popular game.
The Baron New Asia Fund is one of the many funds that have unloaded Sea Limited (NYSE:SE) in recent quarters, explaining its decision to do so in the fund’s Q1 2022 investor letter:
“Sea Limited, a global digital gaming and e-commerce company, detracted from performance for the period held. Similar to other online consumer businesses, Sea faced significant multiple compression in the quarter, exacerbated by a slowdown in user growth at its key Free Fire digital game and mounting investments in its e-commerce operation, particularly in new markets like Brazil. We exited our position as we lost confidence in the long- term unit economics in some of Sea’s new markets and were concerned by the simultaneous slowdown in revenue growth and increase in underlying cash burn.”
4. Riot Blockchain, Inc. (NASDAQ:RIOT)
Number of Hedge Fund Shareholders: 14
Year-to-Date Returns: -67.8%
Riot Blockchain, Inc. (NASDAQ:RIOT) hit a modest all-time high in hedge fund ownership during Q4, but that was followed by a flight from the stock in Q1, as 22% fewer hedge funds were long RIOT shares by the end of the quarter than had been at the start of it. Ken Griffin’s Citadel Investment sold off the remainder of its RIOT stake in Q1 after unloading 64% of its position in Q4.
Riot Blockchain, Inc. (NASDAQ:RIOT) is one of the biggest losers in 2022, but has actually rebounded somewhat in July on the back of rising Bitcoin prices. The miner’s production dropped heavily in July, which was a voluntary move to spare the Texas power grid, and which actually resulted in the company receiving more in benefits ($9 million) than it would have from mining Bitcoins.
Of the coins it does mine, Riot Blockchain, Inc. (NASDAQ:RIOT) is increasingly selling them to fund its operations, including 86% of the 318 coins in mined in July and 71% of the 421 coins it mined in June. The value of the company’s stash of nearly 6,700 Bitcoins accounts for about 15% of its market cap, not to mention higher BTC prices mean mores revenue for the coins the company does sell, which explains why its stock price is so heavily tied to that of the battered down cryptocurrency.
3. Bed Bath & Beyond Inc. (NASDAQ:BBBY)
Number of Hedge Fund Shareholders: 15
Year-to-Date Returns: -27%
There’s been a drop in hedge fund ownership of Bed Bath & Beyond Inc. (NASDAQ:BBBY) over four of the last five quarters, the other quarter being flat. All told, there’s been a 56% decline in the number of funds long BBBY over the past five quarters. Jonathan Soros’ JS Capital and David Harding’s Winton Capital have been among the many BBBY sellers.
Meme stock buyers appear to be trying to mess with hedge funds again, as they have driven up the price of Bed Bath & Beyond Inc. (NASDAQ:BBBY) by about 20% this week on no fundamental news. Shares are still down by over 60% in 2022 however. Bed Bath & Beyond’s comps imploded by 27% in its fiscal Q1, as the company loses market share in the shrinking home furnishings niche.
Even after axing over 500 of its underperforming stores, there is plenty of work left to be done for Bed Bath & Beyond Inc. (NASDAQ:BBBY), whose adjusted gross margin has plunged by 12.1 percentage points to 23.8% over the past two quarters. The company is bleeding money, losing about $1 billion in cash and equivalents from the end of last May until a year later, which has left the company with just over $100 million and prompted it to reach out to private credit providers.
2. Coinbase Global, Inc. (NASDAQ:COIN)
Number of Hedge Fund Shareholders: 46
Year-to-Date Returns: -75.1%
Coinbase Global, Inc. (NASDAQ:COIN) has been relatively popular among hedge funds since its public debut in the second quarter of 2021, but hedge fund ownership fell by 19% during the first quarter as the cracks in the crypto craze began growing wider. Winston Feng’s MassAve Global and Mark Coe’s Intrinsic Edge Capital were some of the funds to unload their Coinbase positions in Q1.
Coinbase Global, Inc. (NASDAQ:COIN) has also been rebounding lately on the strength of BTC and then jumped even further when it formed a partnership with BlackRock Inc. (NYSE:BLK) that will see Coinbase provide crypto trading and custody services to BlackRock’s Aladdin customers. While JMP Securities analyst Devin Ryan doesn’t expect the partnership to a major revenue boon for Coinbase, he likes the optics of it for both the company and industry. Ryan has a $205 price target and ‘Outperform’ rating on COIN shares.
Rowan Street cited Coinbase Global, Inc. (NASDAQ:COIN) founder and CEO Brian Armstrong’s passionate and driven mentality in its Q2 2022 investor letter:
“The mentality of a passionate Founder/CEO drives a completely different thought process and decision-making that makes all the difference. This is a quote by Brian Armstrong, Founder and CEO of Coinbase (NASDAQ:COIN):
‘I can speak with some authority and say we are not going to do that because this is not why I started the company – I don’t have to give any other justification. Rather than the professional CEO that comes in that is accountable to Wall Street and quarterly earnings may start thinking about the company differently. One of the most scarce things in companies today is risk tolerance. For example, take Tesla vs. Waymo. Tesla launched self-driving cars while Google didn’t. The reason is the founder-CEO (Elon Musk) said that I care enough about the mission that we are ready and we are gonna go for it. Whether a professional CEO is thinking about his/her career trajectory, the founder CEO doesn’t care about the next job and only cares about the mission.’“
1. Snap Inc. (NYSE:SNAP)
Number of Hedge Fund Shareholders: 54
Year-to-Date Returns: -78.9%
Topping the list is social media company Snap Inc. (NYSE:SNAP), whose shares have imploded by 79% in 2022 as TikTok eats into its market share among the coveted teen demographic. Hedge funds bailed on SNAP during the past two quarters, as there’s been a 32% drop in ownership of the stock. Philippe Laffont’s Coatue Management and Amish Mehta’s SQN Investors are among the many funds that have ditched their SNAP holdings.
Like Meta, Snap Inc. (NYSE:SNAP) is being done in by the unstoppable popularity of TikTok, as well iOS privacy changes that have dented the social media platform’s advertising effectiveness. Compounding matters is that advertising spending is also falling. Snap’s weakening ad demand in Q2, which contributed to its Adjusted EBITDA crumbling by 94% to $7.2 million during the quarter, looks even worse in light of the subsequent strong ad results for Google Search, which grew revenue by 13%.
The Baron Opportunity Fund cited some of the challenges impacting Snap Inc. (NYSE:SNAP) in its Q4 2021 investor letter, but believed the company was still a good long-term investment:
“Snap Inc. is the leading social network among teens and young adults in North America and a growing number of overseas markets, including Western Europe and India. Shares fell this quarter on a greater-than anticipated impact from Apple’s new privacy changes for iOS mobile devices. These changes made it more difficult for Snapchat to measure the effectiveness of ads shown on its platform. We believe this is a near-term, industry-wide issue for which Snap is already developing a solution. Longer term, we continue to view Snap favorably as the company sustains its rapid pace of product innovation and expands its premium partnerships with advertisers.”
For more of the latest stock picks worth considering for your portfolio, check out Cathie Wood Dumped These 7 Stocks in July and 10 Defensive Restaurant Stocks to Buy Amid Recession Fears.
Disclosure: None.
