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5 Stocks the Smart Money Hates -- But Should You? - views
BALTIMORE (Stockpickr) -- Ah, the "smart money".
That moniker, which refers to the professional investors who run hedge funds, mutual funds and retirement plans, is both a compliment and a jab at the same time. That's because, despite what the name implies, smart money investors often aren't all that smart at all. But they're always important. With around $15 trillion in stocks under management at the biggest firms, the smart money's move matter whether they're right or wrong.
So today, we'll take a look at the stocks that the smart money hates.
Institutional investors have generally been late to the game on this stock rally. They were late to grab equity exposure at the start of 2013, and many fund managers are still skeptical of the broad market's ability to keep moving higher. That relatively tepid smart money sentiment surrounding stocks makes our list of names they can't sell fast enough even more interesting.
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 far, 1,472 funds filed the form for last quarter, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around.
Without further ado, here's a look at five stocks fund managers hate.
For the second quarter in a row, Apple (AAPL) tops off the list of stocks that the smart money hates the most. Only, this past quarter, funds have been accelerating the selloff, unloading more than 2.8 million shares of the tech giant. That's a $1.5 billion stake reduction at share prices from the start of the first quarter. But those sells are misguided right now.
Apple's reach stretches across a number of industries. The firm makes consumer electronics through its iPod, iPhone, iPad and Macintosh lines; it operates the most profitable retail stores in the industry; and it weighs in as the biggest music distributor in the world through iTunes. That scale is impressive; Apple's dominant position in so many different categories puts a big target on its back, and it makes attaining meaningful growth numbers a big challenge.
But there's value there. As I write, Apple currently carries approximately $145 billion in cash and investments, offset by a paltry $17 billion of debt (a tactic the firm is using to avoid a $9.2 billion tax bill from repatriating cash). In a nutshell, Apple has enough wherewithal to pay for a third of its market cap in cold hard cash -- and it's generating more and more every day.
Professional investors aren't immune from chasing performance, and with the conspicuous drop in AAPL since November, it's no surprise that they're under pressure to unload this stock. But with shares trading at a bargain valuation in May and technical strength finally coming back into shares, it looks like plenty of funds could bottom-tick Apple (on the wrong side of the trade). I wouldn't recommend being a seller here.
Materials stocks were high up on institutional investors' sell lists last quarter -- and topping it off was Vale (VALE), the Brazilian miner. Vale is the largest iron ore miner in the world, with more than 300 million metric tons of the metal coming from its mines annually. Vale also produces coal and metals like nickel and copper. Dipping commodities prices sent fund managers hitting the "sell" button on Vale to the tune of 81.1 million shares.
Vale's position in the iron business makes it an attractive name. Ultimately, despite the cyclical nature of the materials industry, economic growth requires iron -- and demand-hungry markets like China still offer upside for the firm. The relatively high quality of Vale's offerings doesn't hurt either. Because the firm is able to produce higher grade commodities from its mines, it's able to command higher prices and get better efficiency pulling metals out of the ground. That helps to offset the geographic challenges of shipping the heavy metal across the globe.
Commodity exposure is inescapable for Vale. While the firm can reduce its risks by hedging with derivatives, Vale doesn't. The flip side to hedging is that the firm's profits aren't diluted when iron prices move higher -- and despite recent weakness, hard commodities remain priced on the high end of their historic ranges. While this isn't a particularly exciting stock right now, it probably doesn't warrant an exodus from shares either.
Hard commodities aren't getting all of institutional investors' hate in 2013; agricultural commodity stocks are too. Enter Agrium (AGU), the Canadian agricultural retailer. Agrium is the largest ag retailer in the U.S., selling fertilizers, chemicals and seed directly to farmers through more than 1,250 locations. One of the most attractive attributes of Agrium is the fact that the firm isn't merely a seller -- it's also the third-largest producer of potash in North America, a factor that should bode well for Agrium's margins as fertilizer prices rise.
Agrium is well-positioned to grab onto bullish trends in the agricultural commodities. Because its customers, the farmers, have that same exposure, they're less price-sensitive to changes in costs than they would otherwise be; fertilizer and seed prices tend to move in lock-step with the prices that farmers are able to charge for their crops.
From a macro standpoint there's reason to be bullish on the agriculture business: Growing populations and declining farmland continue to be major themes worldwide, and demand for efficiency-improving products (like fertilizers) should continue to strengthen. At the same time, Agrium's push to other regions should help to spawn growth in the next few years.
While a proxy battle at AGU has added some extra headline risks for the firm (big holders want to split the firm's retail and wholesale fertilizer businesses), it's my view that ultimately either outcome will likely add value for investors. The combined firm has more cost savings, while the split up firm will likely see value unlocked from a public offering.
Institutions unloaded more than $25 million shares of AGU in the last quarter.
SPDR Gold Trust
One of the more prescient moves made by institutions en masse was to unload gold. As a group, fund managers sold off 10.6 million shares of the popular SPDR Gold Trust (GLD), cutting their exposure to the metal by almost 20%. While gold prices slid 4.6% in the first quarter (while institutions sold), the metal has fallen 10% since.
Many investors don't realize it, but gold is basically a currency -- not a commodity. Because the precious metal has a long history of acting as the reserve currency of last resort, it tends to do well in an environment where uncertainty is high. Unfortunately for gold bugs, the Fed's control over monetary policies (and rates) has sent investors scrambling to buy dollar-denominated assets like treasuries. That's spurred the dollar on a major rally, and it's sent gold prices lower in the process.
There's some speculation that a reversion to higher interest rates will send investors running to gold again thanks to inflation fears. But I think that stocks look like a much more viable target for folks fleeing from treasuries. Investors tend to chase performance, after all, and gold has had a miserable run relative to stocks in recent memory.
If you have some philosophical reasons for owning gold, by all means put money into GLD. But if you're looking for a "trade" that's likely to move higher in the short-to-mid-term, I'd recommend looking elsewhere. Gold's technicals are already broken, and the smart money is living up to its name on this one.
L Brands (LTD) rounds out our list of stocks that institutions hate right now. Don't feel bad if the name doesn't sound familiar; after unloading its namesake The Limited stores in the wake of the Great Recession, management picked the new name as a stopgap until it comes up with something better. Maybe that lackluster naming strategy is what's sending funds that own LTD running for the door. Funds sold 49 million shares of the firm in the first quarter, cutting their stake by more than half.
L Brands' crown jewel is Victoria's Secret. The store chain has a strong brand with celebrity exposure, it operates in the extremely high margin lingerie business, and it sports an economic moat for its trouble. As retailers continue to look for their ideal model, Victoria's Secret will continue to be it.
The firm's less entrenched brands, such as Bath & Body Works and Henri Bendel, don't sport the same level of an economic moat that Victoria's Secret does, but they've been buoyed by a stellar uptick in consumer spending in the last few quarters. As LTD looks for a new direction, investors can find some solace in the fact that management and investors are one in the same. Founder Leslie Wexner and his wife Abigail own a massive chunk of outstanding shares, keeping incentives skewed towards owners over than management.
Hefty margins and a big geographic footprint make LTD a solid way to gain retail exposure, even if the institutional investors don't agree.
To see these stocks in action, check out the at Stocks Fund Managers Hate portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in 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