Hedge Fund Sentiment Suggests You Should Bet On Only One Of These 3 Upgraded Stocks

With the NASDAQ futures modestly up in early morning trade, several stocks have inched up higher, fueled by upgrades issued by analysts earlier today. In this article, we will take a closer look at Intel Corporation (NASDAQ:INTC), Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and Raytheon Company (NYSE:RTN), and see if the smart money sentiment matches the opinion of analysts regarding them.

Analysts at Bernstein upgraded Intel Corporation (NASDAQ:INTC) to ‘Market Perform’ from ‘Underperform’ and raised their target price to $29 from $25, noting that Intel’s client business channel inventory appears to be falling faster than expected. Because of the faster draw down, analysts at Bernstein think Intel’s optimistic second half guidance “seems plausible“. Shares of Intel are down by 19% year-to-date, mainly because of the PC business’ secular declines, and are firmly in value territory with a forward P/E of 12.4 and a dividend yield of 3.3%. Hedge funds are not as bullish as analysts, however. Our data shows that out of the elite 730 or so hedge funds that we track, 48 were long Intel Corporation (NASDAQ:INTC) at the end of the second quarter, down from 61 funds with a long position in the stock a quarter earlier. The collective monetary value of their holdings dropped to $4.2 billion from $5.2 billion in the quarter prior as well. Among the funds that reduced their positions were Phill Gross and Robert Atchinson‘s Adage Capital Management, which cut its position by 6% to 6.5 million shares, and First Eagle Investment Management, which pared its position by 2% to 28.5 million shares at the end of June.

But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect the hedge funds’ activities. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small cap stock picks among hedge funds also bested passive index funds by around 60 percentage points over the 36-month period beginning with September 2012, returning 118% (read more details here).

Moving on, analysts at CLSA and Credit Agricole upgraded Baidu.com, Inc. (ADR) (NASDAQ:BIDU) to ‘Buy’ from ‘Underperform’. Shares are down by 40% year-to-date because of a weak Chinese economy and a shaky Chinese stock market. Now that China’s stock market has stabilized, Baidu should perform better. Shares of Baidu trade at 19.2 times forward earnings and a PEG of 1.39. Unlike analysts, hedge funds are less optimistic. Our data shows that 70 hedge funds were long Baidu.com, Inc. (ADR) (NASDAQ:BIDU) at the end of June, down from 75 hedge funds long the stock at the end of March. Hedge funds had $4.98 billion in aggregate positions, a decline from $7.0 billion at the end of March. Among the funds that cut exposure to the stock was William Von Mueffling’s Cantillon Capital Management, which reduced its position by 3% to 2.2 million shares.

Lastly, analysts at Bernstein upgraded Raytheon Company (NYSE:RTN) to ‘Outperform’ from ‘Market Perform’. The analysts have a target price of $132 per share, or approximately 25% higher than the stock’s current price. Raytheon shares trade at a reasonable 14.7 times forward earnings and are down by 2% year-to-date. Like analysts, hedge funds are fond of Raytheon Company (NYSE:RTN). Our data shows that 37 hedge funds were long Raytheon at the end of June, up from 25 hedge funds long in the stock at the end of March. The total value of hedge funds’ positions increased to $905 million in aggregate (good for 3.1% of the float), up from $669 million in the quarter prior. Cliff Asness’ AQR Capital Management increased its position by 8% to 1.8 million shares, while Israel Englander’s Millennium Management raised its position by 2,014% to 1.4 million shares by the end of the second quarter.

Disclosure: None