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Why Are Hedge Funds Souring On Apple Inc. (AAPL)?

Does Apple Inc. (NASDAQ:AAPL) represent a good buying opportunity at the moment? Let’s briefly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail unconceivably on some occasions, but their stock picks have been generating superior risk-adjusted returns on average over the years.

Apple Inc. (NASDAQ:AAPL) was in 90 hedge funds’ portfolios at the end of June. AAPL has experienced a decrease in hedge fund sentiment in recent months. There were 97 hedge funds in our database with AAPL holdings at the end of the previous quarter. Nevertheless Apple Inc. was still the 15th most popular stock among hedge funds at the end of the second quarter (see the list of 25 most popular stocks among hedge funds).

If you’d ask most traders, hedge funds are perceived as unimportant, outdated financial vehicles of the past. While there are more than 8000 funds trading today, Our experts choose to focus on the upper echelon of this group, approximately 700 funds. These investment experts have their hands on most of all hedge funds’ total asset base, and by tracking their inimitable investments, Insider Monkey has discovered several investment strategies that have historically outrun the market. Insider Monkey’s flagship best performing hedge funds strategy returned 17.4% year to date and outperformed the market by more than 14 percentage points this year. This strategy also outperformed the market by 3 percentage points in the fourth quarter despite the market volatility (see the details here).

Warren Buffett

We’re going to take a look at the key hedge fund action surrounding Apple Inc. (NASDAQ:AAPL).

What have hedge funds been doing with Apple Inc. (NASDAQ:AAPL)?

At the end of the third quarter, a total of 90 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the second quarter of 2018. By comparison, 115 hedge funds held shares or bullish call options in AAPL heading into this year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

AAPL_nov2018

According to Insider Monkey’s hedge fund database, Warren Buffett’s Berkshire Hathaway has the number one position in Apple Inc. (NASDAQ:AAPL), worth close to $46.6 billion, comprising 23.8% of its total 13F portfolio. On Berkshire Hathaway’s heels is Ken Fisher of Fisher Asset Management, with a $2.25 billion position; 2.9% of its 13F portfolio is allocated to the stock. Other professional money managers that are bullish contain Harvard Management Co, Charles Paquelet’s Skylands Capital and Leon Lowenstein’s Lionstone Capital Management.

Seeing as Apple Inc. (NASDAQ:AAPL) has faced falling interest from the smart money, logic holds that there is a sect of money managers that elected to cut their full holdings heading into Q3. Interestingly, Christopher R. Hansen’s Valiant Capital dropped the biggest position of all the hedgies tracked by Insider Monkey, worth about $167.8 million in stock, and Principal Global Investors’s Columbus Circle Investors was right behind this move, as the fund said goodbye to about $57.9 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 7 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Apple Inc. (NASDAQ:AAPL) but similarly valued. We will take a look at Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT). This group of stocks’ market caps resemble AAPL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMZN 137 21034961 7
GOOGL 125 14815899 1
GOOG 122 13498140 4
MSFT 161 28073330 9

As you can see these stocks had an average of 136.25 hedge funds with bullish positions and the average amount invested in these stocks was $19.4 billion. That figure was $56.6 billion in AAPL’s case. Microsoft Corporation (NASDAQ:MSFT) is the most popular stock in this table. On the other hand Alphabet Inc (NASDAQ:GOOG) is the least popular one with only 122 bullish hedge fund positions. Compared to these stocks Apple Inc. (NASDAQ:AAPL) is even less popular than GOOG. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock anymore.

A few years ago Apple was actually the most popular stock among hedge funds. We now observe that growth oriented funds are replaced with value oriented funds. We believe increasingly more hedge funds believe that Apple’s moat isn’t as large as it once looked. Apple’s latest earnings report also showed signs that the company prefers charging higher prices instead of selling more units. We believe Apple shares might experience significant losses within a couple of years as rising interest rates and increasing debt levels trigger a recession. We don’t think investors should follow Warren Buffett into Apple. We just finished a detailed quantitative analysis of Warren Buffett’s historical stock picks and shared the results in a free report (you can download it on our site). According to our analysis Warren Buffett’s large-cap stock picks underperformed the market over the last 4 years by a significant margin. His average returns over the last 18 years don’t look very appetizing either.

Disclosure: None. This article was originally published at Insider Monkey.

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