Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

As a rule, yes, you should follow smart money (mutual funds, hedge funds, and institutional investors in general). Smart money managers are usually better informed about markets than individual investors. The problem, however, is that smart money moves like a herd, rushing into crowded markets, which are often ripe for a correction, as was the case with residential and commercial real-estate shortly before the subprime crash of 2008. But how has smart money fared during the recent market correction?

To answer this question, we reviewed the smart money recommendations published in Barron’s the beginning of November, and reviewed how they performed over the next 3 weeks:

According to a Big Money poll, smart money was cautious, but bullish, with Microsoft (MSFT), Apple (AAPL), Qualcomm (QCOM), Amazon.com (AMZN), Arch Coal (ACH), and JPMorgan Chase, (JPM) being among the most favored stocks for the next 12 months; Netflix (NFLX), Salesforce.com (CRM), Chipotle Mexican Grill (CMG), LinkedIn (LNKD), Google (GOOG), Green Mountain Coffee Roasters (GMCR), Open Table (OPEN), Pandora Media (P), and Research in Motion (RIMM) were considered the most overvalued. Here is how these recommendations fared:

Bullish Bets

Company

Nov. 1

Nov. 23

MSFT

$26.2

$24.2

AAPL

$405

$365

QCOM

$57

$51.90

AMZN

$218

$185

ACH

$14.60

$11.20

JPM

$35

$28.50

Bearish Bets

Company

Nov. 1

Nov. 23

CRM

$132

$104.92

CMG

$340

$300.75

LNKD

$85

$63

GOOG

$585

$564

GMCR

$70

$50

RIMM

$18

$16

P

$15

$10.8

NFLX

$82

$64

Chartwell Investment Partners founder Ed Antoian liked the wireless sector, especially Qualcomm (QCOM), and SBA Communications (SBAC). Here how his portfolio fared:

Bullish Bets

Company

Nov. 1

Nov. 23

QCOM

$57

$51.6

SBAC

$39

$37.37

SPY

$127.5

$115.86

Wall Street Stars liked mostly energy, while they are selective on technology, REITs, and Infrastructure, while they are cautious on euro and consumer discretionary sectors. Felix Zulauf, for instance, likes Energy Select Sector SPDR (XLE), Oil Service HOLDERS (OIH), and SPDR S&P Oil&Gas Exploration and Production (XOP). Scott Black likes Oracle (ORCL), Endo pharmaceuticals (ENDP), and Digital Realty Trust (DLR). Meryl Witmer likes Macquarie Infrastructure. Patrick Neal is short on CurrencyShares Euro Trust (FXE), and Coach (COH). Here is how this portfolio fared:

Bullish Bets

Company

Nov. 1

Nov. 23

XLE

$70

$63

OIH

$130

$112.84

XOP

$54

$48

ORCL

$32

$28.73

ENDP

$31.5

$32.5

DLR

$63

$62.5

FXE

$140

$132

COH

$64

$58

As it can be seen from these tables, with a few exceptions (noncyclical stocks like EDP and DLR), smart money suffered losses, in line with the overall market. Losses, however, were heavy for crowded trades like energy. Oil Holders, for instance, had a bigger decline than the S&P 500. Smart money was smart enough to be cautions on momentum stocks.

The bottom line: Smart money isn’t smarter than the market, though it was smart enough to stay away from momentum stocks. Follow it, but with extreme caution, especially when it comes to crowded trades.

Source: The Smart Money's November Track Record