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4 Stocks the Pros Hate -- But You Should Love - views
BALTIMORE (Stockpickr) -- Professional investors are mad (or scared) right now. And they’ve got a handful of stocks to blame for their troubles.
It hasn’t been a good time to be a pro investor lately -- just rewind back to 2011, when hedge funds (and other pro portfolios) posted their second worst year ever. The managers who took risk off the table at the end of the year missed the rally at the start of 2012, and the ones who put it back on late got hammered when Mr. Market corrected.
But of all the stocks out there, these institutional investors are focusing their hatred on just four. Yes, the pros hate these four stocks right now, but that doesn’t mean you should. Today, we’ll take a closer look at each of them.
To do that, we’re focusing in on 13Fs for the last quarter.
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.
By comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around -- and what investments are faring the best for them. More important, we can figure out what names are getting unloaded from institutional portfolios en masse or lost the most value for the quarter; they’re the stocks that the group agrees they hate.
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Today, we’ll focus on institutional investors’ five most hated stocks for the first quarter of 2012.
First up is Newmont Mining (NEM), a gold mining stock that’s gotten shellacked in 2012 as gold fell out of favor. Shares of Newmont are down more than 15% on the year, versus gains of close to 7% for the S&P 500. In turn, institutions sold off or lost $3.5 billion worth of Newmont stock in the last quarter, a material chunk of their total holdings in the firm.
Let’s make one thing clear from the get-go: If you’re looking for a way to get exposure to gold through mining stocks, Newmont is as good an opportunity as any. The firm weighs in as the world’s second-largest gold producer, and it pays a dividend that’s linked to gold prices. When you add in the fact that mining stocks are still trading at a discount to the value of the metal itself (gold-tracking ETFs are up slightly on the year, for instance), there’s a good case for gold bugs to look into adding onto a position in Newmont.
I wouldn’t recommend doing that blindly, though. Gold prices have been under pressure in 2012, and they could find themselves pressured again in the second half of the year. This week is going to give us some good hints on gold’s trajectory, especially if Fed Chairman Bernanke doesn’t announce QE3 in today's speech (I have my own reasons for thinking he won’t).
Even though hedge funds may be hating Newmont Mining right now, investors should give this stock a second look in June.
Canadian Natural Resources
Another commodity stock that pros hate right now is Canadian Natural Resources (CNQ), an independent oil and gas company with proven reserves of 7.5 billion barrels of oil equivalent. Institutions sold off close to 10 million shares of CNQ in the last quarter, adding onto big year-to-date losses to decrease holdings in CNQ by $3.2 billion.
Like Newmont, CNQ’s biggest catalyst for tumbling in 2012 has been the price of oil. Despite prolonged crude prices in the triple digits, oil prices have gotten shoved down into the low $80s, a drop that materially impacts profitability for oil companies like Canadian Natural Resources. Still, there’s reason to be a fan of CNQ too right now -- the firm owns a significant number of low-cost oil producing properties, positioning that should help the firm keep a handle on profitability even under the pressure of slumping crude prices.
CNQ generates significant cash flows from its operations right now, and while it doesn’t pay out a particularly exciting dividend (it yields just 1.5% at last count), that cash is nearly enough to fund capital spending on new drilling operations. The fact that CNQ doesn’t need to pile on excessive amounts of debt from the capital markets for growth is a good sign.
Still, as with Newmont, I’d recommend waiting for a turnaround in crude prices (and sentiment for Canadian Natural Resources) before buying this stock -- institutions still hate it, after all.
It’s sort of strange that institutions are selling off McDonald’s (MCD) right now. After all, the firm has earned its stripes as a stellar defensive name that actually managed to grow during the recession of 2008, and pays a cash dividend that currently clocks in at a 3% yield.
Still, institutions unloaded more than 14 million shares of McDonald’s in the last quarter -- a small chunk of their total stake in the firm, but still one of only a few stocks that saw selling from their portfolios in the quarter. All told, institutional holdings in MCD dropped by $2.9 billion in the first quarter of 2012.
McDonald’s is the standard bearer in the fast food business, with more than 33,500 restaurant locations spread across 119 countries. The vast majority of those locations are franchised, part of MCD’s unique strategy toward growing its footprint. You see, 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.
Because McDonald’s own team effectively picks the locations for its franchised locations by buying the land, the firm is able to put new locales through analysis and rigor that small franchisors can’t. As a result, McDonald’s boasts average store stales of $2.7 million, well above the industry average.
Selling off McDonald’s shares may just be an example of gain-taking among portfolio managers, but in this environment, MCD’s business should be selling at a premium, not at a discount. Statistically, with less than half the risk of the S&P, I still think McDonald’s is a good pick for investors who want to get defensive with their portfolios.
Institutional investors didn’t sell their of their holdings in Verizon (VZ) in the last quarter, but they still hate the stock. That’s because their holdings in Verizon lost $2.8 billion in the first quarter of 2012. Zooming into specific types of funds tells an even more interesting picture: hedge funds, for instance, did sell in the aggregate, unloading almost 10% of their holdings of the firm.
So should you be a seller too?
To be sure, Verizon does have its share of challenges. The company only owns half of its lucrative wireless business, for instance, and it’s winding down the pricey capital spending of its FiOS fiber optic rollout, a program that some analysts have estimated to cost as much as $4,000 per installed home. But despite headwinds, Verizon has serious scale on its side as well as wireless and fixed-line networks that peers (save for AT&T (T) on the wireless side) will have serious trouble touching in the years to come.
And investors can’t ignore the income. Right now, Verizon pays out a 4.6% dividend yield, a huge payout that’s supported by the massive cash generation that takes place over at Verizon Wireless. With debt additions set to flat-line with FiOS spending slowing, the firm looks like it’s in better shape financially than it was before the recession forced management to rethink its priorities.
Again, here’s a defensive name that investors shouldn’t hate right now, even if the pros do.
To see these stocks in action, check out the Institutions’ Most Hated Q1 2012 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.