By Jake Mann
We track 13F filings from the world's most prominent money managers. Four times a year, our rankings are updated, and for the latest round of fourth-quarter data, there have been a few surprising conclusions. The most notable of these is that Apple (AAPL) has been displaced by AIG (AIG) as hedgies' favorite stock pick, though moves made by George Soros and Ken Griffin are also intriguing.
With this in mind, we thought it would be a good idea to share which stocks hedge funds have been dumping of late. All data has been obtained from recent 13F filings, and it's important to note that this is not a list of the least popular stocks among hedge funds. Rather, it simply details which stocks saw the largest number of hedgies close out their positions in Q4.
Now, the best opportunity for market outperformance comes from mimicking bullish hedge fund sentiment (see how to use this strategy), but bearish activity is important to pay attention to as well. Let's get started.
Of the 450-plus hedge funds we track, Apple saw the greatest number of funds dumping their positions in the fourth quarter. All in all, 24 sold off Cupertino, including Dan Loeb's Third Point and Leon Cooperman's Omega Advisors. While Apple is still the smart money's second most popular stock - with 134 total filers behind AIG's 142 - it's understandable why such a large chunk of managers sold the tech giant in Q4. Shares lost more than 20% over this three-month period, and are already down another 15.5% year-to-date.
Valuation metrics are cheap across the board - every Apple investor is aware of that fact - but it appears that the company may need to expand its investor base, either through an increased dividend or a strengthened share repurchase program. It's worth pointing out that Apple's so-called "secret" hedge fund many be preparing for such a move, and David Einhorn's calls for value-creation fit right in line with this hypothesis; we'll be watching this situation closely.
Tyco International (TYC) saw 18 hedgies dump their positions in Q4. Following a merger of its Flow Controls segment with Pentair Inc., the company split up into three distinct publicly traded units on October 1 of last year: ADT (ADT), Pentair Ltd. (PNR), and Tyco. Post-split, Tyco now focuses solely on fire protection and security services, and it has seen its shares rise by more than 10% year-to-date. Wall Street's average price target on this stock is nearly at parity with current levels, and most valuation metrics are at or near peer averages.
More specifically, Tyco trades at almost 3 times its book value per share, the highest in the security and protection services industry. It doesn't appear that there's anything wrong with this company from a growth standpoint, but ardent investors might be wise to wait for a more attractive entry point if they're considering the new Tyco for the remainder of 2013.
Google (GOOG), next up, is a bit of a surprise on this list (at least conventionally speaking), considering that it just cracked the $800 mark for the first time since its 2004 IPO. All in all, shares of the tech giant gained 6.3% in 2012, and actually dropped below $650 at one point in mid-November. In the fourth quarter, 17 hedge funds sold off their Google positions entirely, which at least partially explains this bearish pressure.
Mr. Market has behaved much better in 2013, and despite the fact that shares are near an all-time high, they still trade at a 5-8% discount to industry average earnings, sales and book value multiples. Falling in line with this data, analysts' average price target on this stock indicates that a 5% upside is expected from current levels. We're curious to see how hedgies have treated this stock in Q1 2013, and we'll be sure to update you on this situation once the next round of 13F filings flutters in.
Microsoft (MSFT) and Goldman Sachs (GS) round out this list, as each company saw a total of 13 hedge funds dumping their stock last quarter. Microsoft itself fell out of the smart money's "fab five" during this period, which was part of a larger trend away from top-tier tech stocks into deeply discounted financial companies.
Goldman Sachs doesn't qualify as "deeply discounted," though, which may explain why aggregate fund activity was increasing in banks with trading prices below book value parity, like Citigroup (C) and Bank of America (BAC), but falling out of GS. Sachs, meanwhile, trades at 1.1 times book, and sports a sales valuation that's more than twice as high as its industry's average.
Interestingly, one common thread that ties Microsoft and Goldman Sachs together is waning support from Wall Street. Over the past three months, the number of analysts with "Buy" recommendations on each of these stocks shrank by an average of more than 20%. Of course, there are still plenty of prominent hedgies invested in both of these companies, but it's always important to consider both sides of the "equation," so to speak, before making an investment decision.