Five Stocks That Have Burned Hedge Funds This Year

While a majority of stocks started 2016 on a really awful note, many of them have recovered over the past few weeks and are now trading with decent year-to-date gains. However, there are a few stocks which have not only failed to recoup the losses they suffered earlier in the year but amid a rally in the broader market have declined further. After compiling a list of the worst year-to-date performers and analyzing it, we found that a few of these badly beaten stocks also ranked among the 50 most popular stocks among the over 800 hedge funds that we track as of December 31. Hence, in this article, we are going to focus on the top five stocks that were popular among hedge funds going into 2016 but have burned them badly so far this year.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 eBay Inc (NASDAQ:EBAY)

 – Investors with Long Positions (as of December 31): 72

 – Aggregate Value of Investors’ Holdings (as of December 31): $2.8 billion

Though shares of eBay rallied by over 12% during the fourth quarter, its ownership among the funds covered by us during the same time fell by 11 and the aggregate value of their holdings in it fell by $883 million. Funds which reduced their stake in the company during that time included Cliff Asness‘ AQR Capital Management, which brought its holding down by 13% to 6.71 million shares. Shares of eBay Inc (NASDAQ:EBAY) have lost over 12% so far this year, with a large part of those losses coming in January after the company reported its fourth quarter financial results. Earlier this month the company raised $1.5 billion in debt which it intends to use for ‘general corporate purposes’. However, a number of investors believe that eBay Inc (NASDAQ:EBAY) might use a portion of that debt for buybacks. Since the company currently trades at a low forward P/E of 11.87 and boasts stable free cash flow, several analysts feel that eBay’s stock has little downside from the levels it currently trades at. However, the jury is still out on whether it has much upside potential either, given its stagnant growth and the spinoff of its higher upside Paypal Holdings Inc. (NASDAQ:PYPL) segment.

#4 JD.Com Inc (ADR)(NASDAQ:JD)

 – Investors with Long Positions (as of December 31): 78

 – Aggregate Value of Investors’ Holdings (as of December 31): $10.84 billion

Shares of Chinese e-commerce behemoth JD.Com Inc (ADR)(NASDAQ:JD) appreciated by 23.8% during the fourth quarter, but have given up nearly all of those gains this year, as they currently trade down by 16% year-to-date. During the October-to-December period, the amount of investors in our database with long positions in the stock increased by seven and the aggregate value of their holdings in it rose by $1.74 billion. On March 1, the company reported its fourth quarter financial results, declaring a loss of $0.07 per share on revenue of $54.60 billion, beating analysts’ expectations of a loss of $0.12 per share on revenue of $51.90 billion. Though most analysts lauded the company’s performance in the fourth quarter in the face of slumping economic conditions in China, some also raised concerns about the company’s increasing investments in its internet financing unit, which had a negative effect on its free cash flow. Analysts at MKM Partners reiterated their ‘Buy’ rating on the stock on March 4, but lowered their price target on it to $34 from $38.

The three stocks that have burned the most hedge funds so far this year are revealed on the next page.

#3 Citigroup Inc (NYSE:C)

 – Investors with Long Positions (as of December 31): 106

 – Aggregate Value of Investors’ Holdings (as of December 31): $9.97 billion

Citigroup Inc (NYSE:C) recently made its 3-year low at $34.52 and though its shares have recovered somewhat since then, they are still trading down by 16.6% year-to-date. Ownership of the investment bank among hedge funds in our database saw a notable decline of 16 during the fourth quarter, though it still ranked as the 12th-most popular stock among hedge funds at the end of December. With ownership of over 102 million shares of the company, Seth Klarman‘s Baupost Group continued to remain its largest shareholder in our system.  According to recent reports, shareholders of JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) will get to vote later this year on potential breakups of the banks. Citigroup currently faces a $792.4 million tax claim from German authorities, who allege that its German subsidiary used a legal loophole to save taxes on dividend-stripping deals. For its fiscal year 2016 first quarter, analysts expect Citigroup to report EPS of $1.19 on revenue of $17.87 billion. For the same quarter of the previous financial year, the bank reported EPS of $1.52 on revenue of $19.70 billion.

#2 Bank of America Corp (NYSE:BAC)

 – Investors with Long Positions (as of December 31): 113

 – Aggregate Value of Investors’ Holdings (as of December 31): $6.80 billion

Amid a 5.4% rise in Bank of America Corp (NYSE:BAC)’s stock during the fourth quarter, the number of funds that we track with long positions in the stock rose by five and the aggregate value of their holdings in it jumped up by $353 million. Billionaire Daniel S. Och‘s OZ Management more than doubled its stake in the bank during that period to nearly 26.75 million shares. Like its peer Citigroup, Bank of America Corp (NYSE:BAC) has also slumped heavily this year, as it currently trades down by almost 19% year-to-date. Due to this decline, the bank now trades at a forward P/E of 8.54 and an abysmally low price-to-book multiple of 0.61. Analysts feel that investors are fearing an earnings decline at the bank overly much and that has made the stock really cheap. On March 18, the bank announced that its board authorized increasing its common stock repurchase plan by up to $800 million, which is in addition to the $4 billion that it had previously authorized.

#1 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

 – Investors with Long Positions (as of December 31): 83

 – Aggregate Value of Investors’ Holdings (as of December 31): $12.55 billion

Without a doubt, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is the stock that has burned hedge funds the worst this year. Though shares of the company started their steep downward journey in August of last year, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was still a very popular stock among hedge funds heading into 2016. During the fourth quarter, when its stock tumbled by over 40%, only five funds covered in our system sold off their holdings in the company. Despite losing a lot of money in Valeant, activist investor Bill Ackman‘s Pershing Square revealed in a regulatory filing that it now owns 9% of the company (including options). Mr. Ackman released a note to his investors last week, in which he wrote, “We continue to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price”. Shares of Valeant are trading down by over 70% year-to-date, with more than half of those losses coming last week after the company issued dismal earnings and revenue guidance and warned investors about a potential debt default. On March 22, the company announced that CEO Michael Pearson will step aside, and that Mr. Ackman will join the company’s board.

Disclosure: None