Wednesday, May 2, 2012

Hedge Funds

5 Stocks Hated by Hedge Funds

Hedge funds may be losing their luster in 2012. While a few prescient (and lucky) hedge fund managers got attention in 2008 for making money during the collapse, don’t think that the “smart money” is immune from losses.

Hedgies posted their second-worst year in history last year, with most ending 2011 dramatically underperforming the S&P 500 — and this year, scores of funds were out of stocks when the market rallied, leaving many managers in catch-up mode. What does it all mean? For starters, it means that too many managers are becoming reactionary in their portfolio picks — and investors have something to learn from what they’re not doing.

Too often, investors only focus on what institutional investors like hedge funds [cnbc explains] are buying; but there’s something to be gleaned from both sides of the trade. So instead, we’ll focus on five stocks that hedge funds hate today.

To do that, we’re focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F — a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F. So far, 762 firms filed the form for the first quarter of 2012, and by comparing one quarter’s filing with another, we can see how any single fund manager is moving their portfolio around.

Without further ado, here’s a look at five stocks hedge fund managers hate.

5. McDonald’s

First up is fast-food giant McDonald’s [MCD 97.51 0.31 (+0.32%) ], a stock that actually rallied hard in 2011 when most other names were floundering. Without a doubt, McDonald’s is about as defensive as a name can get — its food is cheap, its brand is universally recognized, and the company thrives when times are tough. Still, institutional investors sold off McDonald’s more than any other stock this past quarter, unloading more than 10 percent of their aggregate holdings: 7.35 million shares.


McDonald’s is a massive company with a global footprint. It’s the top fast-food name in almost every market it operates in, and efforts to add amenities and upgrade menus in U.S. stores should make the firm that much more appetizing for investors in 2012.

Also attractive is McDonald’s balance sheet; in many cases, the firm owns the properties that franchised restaurants are located on, giving the company greater income from each location than other restaurant franchisors receive. Better still, a tenable debt load is offset by massive cash generation each quarter.

It’s not a huge surprise that hedge funds are unloading McDonald’s. With funds underperforming the S&P 500 this year, they’ve got to ramp up risk to catch up. McDonald’s simply isn’t a risky enough stock to do that. But with a 2.9 percent dividend yield and unmatched defensive properties for your portfolio, it makes sense to pick up shares of McDonald’s while the selling keeps share prices down.

4. Verizon Communications

Telecom giant Verizon Communications [VZ 40.60 0.04 (+0.1%) ] boasts some impressive stats: The company owns the biggest mobile phone network, it serves more Americans with local phone service than any other bell utility, and it has a massive, brand-new fiber optic network that reaches more homes each month. But none of those stats kept Verizon in hedge funds’ portfolios last quarter. Institutions unloaded 12.8 million shares of the firm last quarter, again close to 10 percent of overall institutional ownership in the stock.

All too often, investors focus on solely Verizon Wireless when they look at Verizon. While the mobile-phone arm is a major component of Verizon’s business (and profitability), Verizon only owns half of the business. The fixed-line unit hasn’t looked that impressive on the surface in recent years, but once the massive capital spending of installing FiOS winds down, the cash thrown off by the business is going to look a lot more attractive.

Like McDonald’s, Verizon’s selling is largely a matter of risk — Verizon doesn’t have enough of it. What Verizon does have is deep margins, steady top-line growth, and a nearly 5 percent dividend yield.

While the hedgies try to ramp up their risk, investors in search of income need to give this telco a second look.

3. Siemens

German industrial manufacturer Siemens [VZ 40.60 0.04 (+0.1%) ] has some big black clouds over it right now, the result of massive exposure to Europe’s economy. Today, around 60 percent of sales come from the European Union. That means that Siemens has one of the biggest targets on its back when euro zone stock indices sell off.


With shares down around 8 percent in the last month, institutional investors have been unloading their stakes in Siemens. In the last quarter, funds unloaded 5.65 million shares, two-thirds of Siemens holdings, from their portfolios.

Siemens is a giant in the automation, health care, and energy segments, where the firm generates the lion’s share of its earnings. Because all three of those manufacturing businesses tend to be capital intense and cyclical, there’s a big risk that a prolonged economic hiccup in Europe could really impact Siemens’ results in 2012. Emerging market demand for infrastructure is one of Siemens’ biggest avenues for growth — but competition from the likes of General Electric [GE 19.77 -0.03 (-0.15%) ] makes all of the battles hard-fought.

In this case, institutions are making a smart move in reducing holdings in Siemens. The excessive exposure to Europe isn’t going to get resolved in the near-term. Instead, it makes sense to wait for July’s third-quarter earnings call and a reduction in European market volatility before getting back on board with this stock.

2. Roche Holdings

Roche Holdings (RHHBY: Pink Sheets) is another European stock that had the majority of its institutional shares unloaded in the last quarter. Funds sold off 9.68 million shares of Roche’s U.S.-listed American depositary receipt last quarter, leaving just 4.47 million shares in their collective holdings.

Roche doesn’t suffer from the same issues that Siemens has. Because the pharmaceutical and diagnostic company has a massive market in the U.S. and developing economies, where its blockbuster cancer therapies and cardiovascular treatments have patent protection, the company’s revenue stream isn’t nearly as susceptible to economic stumbles in the euro zone.

Last year’s decision to acquire the rest of Genentech was a good move — one that gave Roche full claim to the subsidiary’s drug pipeline. While an attempt to purchase Illumina [ILMN 46.51 0.59 (+1.28%) ] was rebuffed by the firm’s board, Roche still has plenty of dry powder to pick up another bargain biotech name.

Like big pharma peers, Roche pays out an impressive dividend yield right now, at 4 percent. While it’s not a major standout in its industry, it’s hardly a name that investors should be running scared from in May.

1. PepsiCo

PepsiCo is another defensive name to add to our list. In the last quarter, institutions have unloaded 5.7 million shares of the $104 billion beverage and snack behemoth. PepsiCo owns some of the most attractive names on your grocer’s shelves right now. From namesake Pepsi to Lay’s, Dorito’s, and Gatorade, PepsiCo’s portfolio of brands makes it the world’s biggest snack-food company and the world’s second-biggest beverage stock.

No great surprise, Pepsi is a relatively low-risk name. Consumers are much less likely to trade down their snack brands, opting to start with household brands instead. So even though more than half of PepsiCo’s sales come from the U.S., the company barely saw a stammer in its top line during the recession [cnbc explains] .

Like most other blue chip consumer stocks, PepsiCo is looking toward emerging markets for growth opportunities. A mature distribution network should help cement PepsiCo’s growth in new markets. In the mean time, the company is looking relatively cheap on a historic basis; a 3.1 percent dividend yield makes this stock look all the more attractive right now, in spite of hedge funds’ selling pressures.

Investors shouldn’t follow funds’ coattails in unloading this holding from their portfolios.

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