BALTIMORE (Stockpickr) -- When the "smart money" piles behind a stock, you know that things are going to get interesting. And when the opposite happens -- when they hate a stock -- it's bound to get even more interesting.
After all, it's the sell list -- the names that institutional investors hate the most -- that represents some of the biggest conviction moves. Scouring fund managers' hate list is valuable for two important reasons: it includes names you should sell too, and it includes names that they're wrong about selling.
You see, hedge funds have a problem on their hands -- they're underperforming the rest of the market in 2014. Year-to-date, the average hedge fund is up just 3.34% according to performance data from BarclayHedge. That's well shy of the S&P 500's 8.7% return so far this year. And that underperformance means that hedge funds are panicking when positions aren't working out quickly.
Pro investors aren't immune from letting their emotions get the better of their trading. And when investors get emotionally involved with the names in their portfolios, they often do the wrong thing.
As a result, in many cases, portfolio managers are leaving money on the table. So today, we're taking a closer look at the stocks they hate the most to figure out where the opportunities lie this fall.
Luckily for us, we can get a glimpse at exactly which stocks top hedge funds' hate lists by looking at 13F statements. 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, without further ado, here's a look at five stocks fund managers hate...
Schlumberger
Most of the selling last quarter took place in the energy sector -- and within it, no single stock got sold off as hard by funds as Schlumberger (SLB). All told, funds unloaded more than 4.57 million shares of the oil field servicer, a stake that's worth close to $430 million at current price levels. So, should you sell too? Not so fast.
Schlumberger is the biggest oil service company on the planet. The firm's revenues come from a menu of specialized field services such as seismic surveys and well drilling and positioning. In a nutshell, SLB's job is to pull oil out of the ground as efficiently as possible -- and with oil prices in freefall, SLB's value proposition matters more now than it did when crude was trading in the triple-digits. Oil firms turn to Schlumberger because the tasks they need to accomplish are too nuanced or proprietary to pull off in-house. And that gives the firm a deep economic moat.
Another part of SLB's deep moat comes from boots on the ground. Because Schlumberger is on-site at its clients' well locations, the firm is able to sell more complementary services at one time. The energy sector has gotten shellacked in the last few months, and frankly, that downward pressure isn't showing any signs of letting up. That said, SLB's revenues don't ebb and flow exactly in step with crude prices (unlike its clients), and shares look oversold here.
Chevron Corp.
One of Schlumberger's biggest partners is oil and gas supermajor Chevron Corp. (CVX). No, Chevron isn't the biggest of the oil companies, but it might just be the most attractive from a financial standpoint. Not that that helped the firm avoid fund managers' wrath last quarter -- funds unloaded more than 3.17 million shares of Chevron during the third quarter of 2014, a stake worth more than $365 million today.
Chevron's scale is huge. The firm produces 2.6 million barrels of oil equivalent a day, and sports proven reserves of 11.3 billion barrels. Chevron's outsized exposure to oil (versus the natural gas that peers have been buying up) has hurt it lately, as crude prices fell faster than natgas, no question about it. And because oil companies are basically leveraged bets on commodity prices, as crude gets closer to Chevron's cost of production, there are some real risks to long-term profitability that investors need to be thinking of.
I said earlier that CVX is the best-positioned supermajor financially. That's because the firm currently carries $16.6 billion in net cash and investments, the least-leveraged balance sheet in big energy right now. At current price levels, that net cash level is enough to cover close to 8% of Chevron's market capitalization. Even if Chevron is best-in-breed, it's best in a sketchy breed right now -- oil prices could realistically move lower, and Chevron's technical trajectory is down.
If you're yearning for energy sector exposure, Schlumberger has a more attractive risk/reward tradeoff right now.
McDonald's
Switching gears outside of the energy sector brings us to fast food chain McDonald's (MCD), another name on hedge funds' hate list. McDonald's has had a pretty tepid year in 2014, down 2.6% over a stretch when the S&P is within grabbing distance of double-digit upside. So it's not hugely surprising that fund managers don't have the patience to stick it out with MCD this fall. Funds sold 2.29 million shares of McDonald's over the course of the third quarter...
McDonald's is the biggest fast food restaurant chain in the world, with approximately 35,900 restaurant locations in 125 countries. Of those, nearly 7,000 are company-owned units. The other 80% of stores are franchised. That model has been a cash cow for MCD shareholders in the past, giving the firm claim to sticky recurring revenues supplying franchise stores with food ingredients, marketing, and employee training. Importantly, McDonald's owns the land beneath the majority of its franchisee restaurants; that huge land portfolio gives McDonald's more in common with a REIT than with the diner down the street.
The competitive nature of the fast food business means that MCD has gotten the squeeze in recent quarters as it tries to play catch up with a consumer that's moving up the "food chain" (so to speak) -- an ongoing initiative to improve food quality and make MCD more nimble should pay dividends down the road. In the meantime, McDonald's continues to execute well, especially given the discount currently on shares versus six months ago. The firm's 3.6% dividend yield should add some extra attractiveness given the prolonged low-interest rate environment that's expected to stretch well into 2015.
It looks like funds are making a mistake by selling MCD early here...
Qualcomm
Qualcomm (QCOM) is another name that's "bored" performance-focused hedge funds into selling: Qualcomm has been a laggard this year, only earning total returns of 5.5% so far in 2014. Funds sold 2.88 million shares of the wireless technology stock in the most recent quarter, a quarter-billion dollar stake at current price levels.
Qualcomm is a chipmaker that produces everything from processors to wireless communications cards. The firm's flagship Snapdragon processors provide OEMs with a completely integrated solution that can handle processing tasks, but also includes baseband features that connect to cellular networks. As handset makers continue to try to pack more features into the same device footprint, QCOM's expertise is increasingly valuable. That's why its products are found in nearly every middle to high-end smartphone on the market today.
The firm also a major a major tech IP licensor. The Qualcomm's patents effectively mean that every handset maker in the world has to pay royalties if they want their phones to operate on 3G and 4G networks. That makes QCOM a great pure play on the smartphone market as a whole. Likewise, Qualcomm is in stellar financial shape, with close to $33 billion in cash and investments on its balance sheet, and no debt. That's works out to almost $20 per share in cash and investments, enough to cover a quarter of QCOM's market capitalization today.
Ex-cash, shares trade for 13.9 -- a pretty cheap multiple given the handset growth expected in emerging markets over the next few years. Don't follow funds' sale of this stock.
American Express
Last up on pro investors' hate list is American Express (AXP).
American Express is the No. 3 payment network in the world, behind Visa (V) and MasterCard (MA), positioning that gives it a front-row seat to the fast adoption of electronic payments. Because AXP's network is closed-loop (it's the issuer on the majority of its cards), it enjoys some hard-to-replicate advantages over those peers. By focusing on attracting high-spending affluent consumers and businesses with its rewards programs and benefits (instead of focusing on issuing credit in volume), the firm owns a profitable niche in its flagship charge card products. And it collects bigger fees for its trouble.
Charge card products limit AXP's exposure to credit risk, while expanding programs with third-party lenders have been growing the firm's transaction volume. While mobile payments were seen as a risk to American Express' business, the fact that the recently-launched Apple Pay platform integrates the existing networks means that mobile payments could actually help entrench AXP's share of the market.
Last quarter, funds sold off 192,000 shares of American Express, making it the single most-hated name in the financial sector. AmEx looks like another one where the funds got it wrong...
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji
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