While it may seem logical for an everyday investor to go long in a company that many hedge funds are bullish on, it is less obvious to steer clear of businesses that have fallen out of favor among these investment firms, namely because that data is harder to come by. That’s where we come in. In order to provide some clarity and certainty on this matter, we have formulated a list of five stocks that were summarily ejected from the portfolios of prominent hedge funds during the first quarter, including Dan Loeb‘s Third Point, David Tepper’s Appaloosa Management LP, Seth Klarman’s Baupost Group, and Nelson Peltz‘s Trian Partners. In this article, we’ll try to gauge why these large positions in popular stocks were closed by top hedge funds, using various analytical tools.
At Insider Monkey, we track nearly 800 hedge funds and other institutional investors as part of our small-cap strategy, which can help a retail investor beat Mr. Market by nearly one percentage point per month (see the details). Additionally, we can use the data to see how hedge funds collectively positioned themselves in different companies.
Morgan Stanley (NYSE:MS)
To begin with, Third Point sold off its 3 million-share position in Morgan Stanley during the first quarter. Considering that Morgan Stanley (NYSE:MS)’s stock has cratered by more than 31% in the last 12 months, Third Point’s move isn’t necessarily a surprise. However, shares are currently trading below the tangible book value of the company, and while the bank holding company’s EPS is expected to remain flat for the third year in a row in 2016, there are expectations for a lift-off in 2017. The short interest in Morgan Stanley was fairly small at the end of April, covering just 0.89% of the company’s float. Clint Carlson‘s Carlson Capital slashed its holding in Morgan Stanley (NYSE:MS) by 38% to 2.25 million shares during the March quarter.
Micron Technology, Inc. (NASDAQ:MU)
Next up is the eviction of 1.00 million Micron Technology shares from Seth Klarman‘s fund. Baupost initiated a position in Micron Technology, Inc. (NASDAQ:MU) during the second quarter of 2013, with the holding totaling 41.5 million shares at that time. Hurt by oversupply in the DRAM and NAND markets, Micron Technology, Inc. (NASDAQ:MU)’s stock has plummeted by 63.5% over the last 12 months, while the short interest in the stock still stood at 5.7% of its outstanding float at the end of April. However, some analysts believe that the stock price is close to a trough, with little or no further downside. Positive news for Micron came late last month when rival SK Hynix said that it anticipates roughly 15% growth in its shipment of DRAM products during the second quarter. Ray Dalio’s Bridgewater Associates also believes that a turnaround might be around the corner for Micron Technology, Inc. (NASDAQ:MU), as it hiked its stake in the company by more than five-fold, to 2.26 million shares during the January-to-March period.
We’ll discuss three more first quarter moves out of stocks on the next page.