Hedge Funds Are Still Crazy About These 5 Declining Stocks

The third quarter of 2015 was unarguably one of the most volatile periods for the equity markets in the last four years. While some stocks were beaten down aggressively during that period, others suffered only minor dents and scratches. However, there is a particular class of stocks from that period that we want to cover, and that is stocks which slumped hard during the third quarter, but didn’t see top investors lose much of their conviction for them. Since these companies lost a lot of their value since July, these stocks could make for bargain purchases. All five of the stocks on the following list witnessed a share decline of more than 25% during the July-to-September period, and have at least 70 hedge funds which we track at Insider Monkey owning a stake in them as of the end of September. Read further to know which stocks made it to this intriguing list.

#5 Kinder Morgan Inc (NYSE:KMI)

Investors with Long Positions (as of September 30): 72

Aggregate Value of Investors’ Holdings (as of September 30): $1.82 Billion

Although the stock of Kinder Morgan Inc (NYSE:KMI) declined by almost 27% during the third quarter and the aggregate value of the Kinder Morgan holdings among the investors that we track also saw a more than 25% drop during the same period, there was nonetheless a jump of eight in the number of investors long KMI. On a year-to-date basis, the energy infrastructure behemoth has lost more than half of its market capitalization. A part of those losses came on Monday, when the stock declined by 7.81% after it became clear that the company will bear the maximum brunt of the $171 million lawsuit that investors of an MLP filed against El Paso, a company that Kinder Morgan Inc (NYSE:KMI) acquired in 2014. Billionaire Daniel S. Och‘s OZ Management was one of the funds that increased its stake in the company during the third quarter; it held over 13.8 million shares of Kinder Morgan Inc as of September 30.

#4 Sunedison Inc (NYSE:SUNE)

Investors with Long Positions (as of September 30): 73

Aggregate Value of Investors’ Holdings (as of September 30): $1.06 Billion

Moving on, Sunedison Inc (NYSE:SUNE) is the stock in this list that not only suffered the harshest decline during the third quarter (down by 76%), but also suffered the largest drop in popularity among hedge funds during the same period. The number of hedge funds long SunEdison came down by 20 during the July-to-September period and the aggregate value of their holdings in it also dropped by a whopping 80% during the same period. The stock has continued its decline into the fourth quarter and is now trading down by almost 82% year-to-date. However, a large number of analysts that cover the stock are hugely bullish on it at current levels. On December 1, analysts at Credit Suisse reiterated their ‘Buy’ rating and $25 price target on it, which represents a potential upside of 600%. Kenneth Tropin‘s Graham Capital Management reduced its stake in the company by more than half, to 13 million shares during the third quarter.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#3 Williams Companies Inc (NYSE:WMB)

Investors with Long Positions (as of September 30): 73

Aggregate Value of Investors’ Holdings (as of September 30): $6.05 Billion

Williams Companies Inc (NYSE:WMB)’s stock slumped by nearly 35% during the third quarter and the number of funds that we track which owned it also came down by 13 during the same period. An even bigger decline was witnessed in the aggregate value of their collective Williams Companies holdings, which came down by over $4.5 billion during the July-to-September period. Shares have recovered slightly in the fourth quarter and trade down by 21% year-to-date. On October 28, Williams Companies reported its third quarter earnings, declaring EPS of $0.22 on revenue of $2.03 billion, which was better than the EPS of $0.15 on revenue of $2.02 billion that it reported for the same quarter of last year. Richard Perry‘s Perry Capital reduced its stake in the company by 13% to 8.35 million shares during the September quarter.

#2 Mylan NV (NASDAQ:MYL)

Investors with Long Positions (as of September 30): 74

Aggregate Value of Investors’ Holdings (as of September 30): $2.84 Billion

Mylan NV (NASDAQ:MYL) is an outlier in this list, as even though its stock crashed by over 40% during the third quarter, on a year-to-date basis its down by just 7.61%, thanks partly to its 21% rise in the fourth quarter. However, the decline in the third quarter did weigh on the stock’s popularity among hedge funds, as 18 fewer funds in our database held the stock by the end of the quarter, while the aggregate value of their holdings came down by $1.5 billion. On November 13, Mylan formally announced that it has lost its 7-month-old, $26 billion takeover bid for Irish drugmaker Perrigo Company plc (NYSE:PRGO). Three days after the announcement, Mylan announced that it will be buying back $1 billion worth of shares in an effort to appease investors. Phill Gross and Robert Atchinson‘s Adage Capital Management made a greater than eight-fold increase to its stake in Mylan NV (NASDAQ:MYL) during the third quarter, to 565,236 shares.

#1 Yahoo! Inc. (NASDAQ:YHOO)

Investors with Long Positions (as of September 30): 89

Aggregate Value of Investors’ Holdings (as of September 30): $5.47 Billion

Finally, erstwhile tech company Yahoo! Inc. (NASDAQ:YHOO) emerged as the most popular heavily-fallen stock among hedge funds at the end of September. During the third quarter Yahoo shares slumped by 26.4% and the number of funds that were long the stock also declined by 15. Nevertheless, the aggregate value of investors’ holdings in the company didn’t see a similar decline during that period, dipping by just 7.6%. Thus, the number of shares of the company held by hedge funds that we track actually increased during the July-to-September period, despite 15 fewer funds holding positions, as some of the remaining investors fortified their Yahoo holdings. Although Yahoo’s shares have recovered in the fourth quarter, they are still trading down by 30% year-to-date.

Earlier this week reports emerged that Yahoo! Inc.’s Board will have meetings throughout the week to discuss halting the spin-off of the company’s stake in Alibaba Group Holding Ltd (NYSE:BABA) in addition to mulling the possibility of selling the company’s core internet business. These suggestions were first made to Yahoo’s Board by activist investor Jeffrey Smith of Starboard Value LP, in a letter sent to the Board last month. Interestingly, Starboard Value LP more than doubled its stake in Yahoo! Inc. (NASDAQ:YHOO) to 7.1 million shares during the third quarter, before making those suggestions.

Disclosure: None