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5 Stocks Fund Managers Hate for 2012 - views
BALTIMORE (Stockpickr) -- It’s no surprise that investors want to know what professional fund managers are buying. After all, knowing what a successful investor is doing with his firm’s cash can tell you a lot about where you might want to put yours.
But why isn’t there the same amount of attention on the stocks that fund managers hate?
There should be. It’s one thing to know when Wall Street thinks a stock is headed higher, and yet another when professionals think that it’s poisoning their portfolios. Knowing which stocks to avoid can mean the difference between a strong year for your stocks and a horrific one.
With that, we’re taking a look at the stocks fund managers unloaded the most in the last quarter -- and why.
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.
In total, 3,081 firms filed the form for the third quarter of 2011, and by comparing one quarter’s filing with another, we can see how any single fund manager is moving his or her portfolio around.
We’re not just talking about share sales here -- we’re also talking about declines in total value. With year-end just a couple of weeks away, funds are in window dressing mode, unloading losers and picking up winners; that could mean that these hated stocks are due for more selling into the end of the year.
Without further ado, here’s a look at five stocks fund managers hate.
It should come as no surprise that the biggest drops in market value from institutional investors’ portfolios came from the financial sector. Between share price declines and position sales, managers hate these names, and banks make up far less of institutions’ $11.8 trillion under management than they did last quarter.
From a market value standpoint, the most hated is JPMorgan Chase (JPM).
All told, firms have sold off 100.4 million shares of the firm, which now makes up $33.7 billion less of professional portfolios thanks to those sales and a 26% decline year-to-date. That makes JPM the most hated stock on this list.
To be fair, part of the reason that institutions are able to unload so many shares of JPM is that they had so many to begin with. Despite the decline, institutions still own an $82 billion position in shares. (For example, the stock comprises 3% of Maverick Capital's portfolio and 2.8% of Blue Ridge Capital's portfolio.) But as managers rebalance their money, JPM could get unloaded further in the fourth quarter.
As far as big banks go, JPM isn’t the worst name out there; it’s the best. The firm has returned to a strong level of profitability, and its dividend yield currently weighs in at 3.2% -- those are two factors that currently bode well for investors.
While risks are quite high in the banking sector right now, I think that there’s an opportunity to buy weakness in this stock.
Recently, JPMorgan shows up on several watch lists for the coming year, including Big Banks Set to Rebound in 2012, 5 Bank Stock Picks for 2012 by Goldman Sachs and 10 Banks With Most Upside for 2012.
Bank of America
The same can’t exactly be said for Bank of America (BAC). Institutions unloaded 249 million shares of BofA last quarter, contributing to a total market value decline of $29.8 billion. (Even so, there were still some big buys in the stock, with John Paulson's Paulson & Co. scooping up another 3.9 million shares and Bruce Berkowitz's Fairholme Capital Management adding 5.4 million shares.)
A lot of that decline came from the horrific performance this stock has had in the last year -- a 60% drop from an already depressed price, making it one of the 10 Worst-Performing S&P 500 Stocks of the Year and 5 Worst-Performing Dow Stocks of the Year.
So does it still make sense to own this stock?
Well, like JPM, BofA has made some major strides in recent years. The firm has reduced risks, settled outstanding litigation, and renewed its focus on its core banking business -- three initiatives that investors should appreciate. At the same time, the risks in BofA are substantial. Bank of America needs more capital to comply with Basel III requirements, and the huge black cloud of mortgages from the firm’s Countrywide acquisition could easily erode more of the firm’s assets in the mean time.
Assuming a smooth road to economic recovery, Bank of America is a sure thing: a deeply discounted stock that will deliver exceptional gains. But the financial system is looking far from smooth right now. If BofA hits a capital crunch, it may be forced to dilute shareholders’ ownership or disassemble itself.
That risk makes this stock only suitable for individual investors as a speculation.
In a world of triple-digit oil, it may sound surprising to hear that Exxon Mobil (XOM) made the list of most-hated stocks for last quarter -- as well as a recent list of 5 Stocks JPMorgan Warns to Absolutely Avoid. But institutions sold off nearly 35 million shares of the firm, contributing to a $22.7 billion decrease in market value from institutional portfolios from XOM. (Warren Buffett, however, maintained the 421,800-share position in the stock in his Berkshire Hathaway portfolio.)
Even though there was serious selling in this stock, it’s important to remember that we’re talking about the biggest publicly traded company in the world -- one of the few stocks that can drop $22.7 billion in value without indicating a meltdown. Still, the net selling of Exxon’s shares is surprising, especially given oil prices in the last several months.
As the largest of the supermajors, Exxon has its hand in everything from oil exploration and production to refining and retailing. That vertically integrated structure means that Exxon is able to generate sizable margins in most economic conditions -- and even larger profits when oil is as pricey as it is right now. A heightened focus on natural gas in recent years looks equally compelling right now, especially as crude prices may compel fuel users to substitute one source for the other. While massive scale can be a concern in some industries, oil isn’t one of them.
Investors would do well to take a contrarian view of this stock as we approach 2012.
It’s been a challenging year for General Electric (GE). Not only has this $173 billion conglomerate seen a 10.2% decline year-to-date (it's one of the 5 Worst-Performing Dow Stocks of the Year), from a technical standpoint , GE is also showing weak relative strength more recently.
It shouldn’t come as a surprise, then, that GE is among the most-hated names for the past quarter, shedding $20.7 billion from institutional portfolios as managers took capital losses and sold another 54 million shares. (This in spite of buying from the likes of Seven Cohen's SAC Capital, which added 4.3 million shares of the stock in the third quarter.)
General Electric has its hands in many disparate businesses, from jet engines to home appliances. That diversified manufacturing focus provides GE with some degree of independence from the business cycle, and ample cross-selling opportunities. A focus on new technologies (like next-generation green energy) should help the firm maintain its leadership position in most of the markets that it operates in.
Still, there’s a big black cloud hanging over GE’s business: GE Capital. The firm’s financial services arm makes up a full 25% of the consolidated firm’s bottom line -- exposure that could become a concern again. While GE’s loan book has been improving for the last few quarters, more economic rockiness could make its financing business a drag on earnings rather than a driver.
At the very least, it doesn’t make sense to be a buyer of GE until it shows more technical strength.
Freeport-McMoRan Copper & Gold
Another name that may come as a surprise on this list is Freeport-McMoRan Copper & Gold (FCX), one of TheStreet Ratings' top-rated metals and mining stocks. While this metal miner has exposure to an attractive portfolio that ranges from copper and molybdenum to gold and cobalt, institutional investors have been on a selling spree lately. Following an 18.5 million share selloff from funds and a $16.5 billion decline in the market value of those funds’ holdings of FCX, institutions have essentially halved their exposure to Freeport in the last quarter.
But Freeport looks like another contrarian commodity opportunity right now. As the largest public copper producer, Freeport has benefitted immensely from the rally copper prices have enjoyed for most of this year, and it shows in the firm’s margins. A combination of low-cost mine properties and the climbing value of the stuff Freeport pulls out of the ground should continue to drive profitability (and shareholder returns) into 2012.
The best-case scenario for this stock is more financial uncertainty that doesn’t impact the industrial consumption of copper. If that happens, Freeport should continue to see its metal prices climb, and institutional investors will regret unloading shares.
To see these stocks in action, check out the at Stocks Fund Managers Hate Q3 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.