By Renee O'Farrell
Hedge funds tend to have the inside track on what is happening in the stock markets. It isn't because of insider information - at least not usually. It's just what happens when you have millions (if not billions) of assets under management and enough clout to get the CEOs of major companies to talk to you. Hedge funds also have massive resources, often employing dozens, if not hundreds, of people to watch and interpret market movements. In other words, hedge funds have an edge when it comes to investing so when they start selling stock in a specific company investors would do well to give their investments a closer look.
Looking at the stocks hedge funds held at the end of the first quarter 2012 compared to the end of last year, there were a handful of companies that hedge funds abandoned in droves during the first quarter. Let's look at four of those companies in greater detail:
Bed Bath & Beyond (BBBY): The number of hedge funds with positions in home goods department store chain Bed Bath & Beyond fell from 31 at the end of December to just 18 at the end of the first quarter. Right now, the stock is up 20.39% year to date and trading for $70.64 a share. Bed Bath & Beyond is priced low with its forward price to earnings ratio of 13.60 - and its earnings estimates look decent.
Analysts say the company's earnings will increase by an average rate of 14.03% a year over the next five years, down marginally from its average earnings per share increase of 14.24% per annum over the past five years. Ray Dalio's Bridgewater Associates and Joel Greenblatt's Gotham Asset Management both cut their positions in Bed Bath & Beyond during the first quarter. I think investors buying in now could reap some benefit but why bother when there are so many other, more promising investments out there.
Lennox International (LII): Hedge fund investment in climate control products company Lennox fell from 20 hedge funds at the end of 2011 to just seven by the end of March. Tom Gayner's Markel Gayner Asset Management held on, even increasing its stake in the company but, looking at its numbers, I just don't see it. Lennox is a company that is up almost 25% year to date. It is trading at $42.16 a share, which is about 13.20 times its forward earnings. The company's earnings fell over 6% a year on average over the past five years.
Looking ahead, analysts are expecting Lennox's earnings to grow at an average rate of 15.90% a year over the next five years. I really just don't see it. I recommend avoiding this stock.
Research In Motion (RIMM): The infamous Research In Motion has had a tough time of things lately. The BlackBerry maker went from having one of the most popular phones in the world to barely hanging on to its market share - and the company hasn't fared so much better with hedge funds. During the first quarter, the number of hedge funds invested in the company slipped from 38 at the end of December to just 27 at the end of March. Granted, the total volume of hedge fund investment in the company did increase and the company is priced fairly low at $11.01 a share or 6.57 times its forward earnings, but I think its ship has pretty much sailed.
Research In Motion is a risky play right now. Analysts say its earnings will grow at a rate of 5.83% a year on average over the next five years but I don't think this is enough to make the risk worth it, especially since its EPS growth rate over the past five years was closer to 15% a year on average. Both Ray Dalio's Bridgewater Associates and Leon Cooperman's Omega Advisors sold out of their positions in the company during the first quarter. I recommend investors steer clear or be prepared to endure major risk.
News Corp (NWS): Diversified communications company News Corp. is priced fairly low at $19.50 a share or 11.54 times its forward earnings, but I just don't see it. The number of funds invested in the company went from 61 at the end of 2011 to 49 at the end of March. News Corp. is a risky play right now. Analysts say its earnings could grow at a rate of 17.44% a year on average over the next five years (up from an earnings growth rate of 5.47% a year on average over the past five years) but I think the reality is that the company turning things around enough to bring in a payday for investors is unlikely. Steve Mandel's Lone Pine Capital sold out of its position in News Corp. during the first quarter and I think that was probably the smart way to go.