Hedge Funds Dumped These Surging Stocks During Q3

Stock market returns were quite disappointing in the turbulent third quarter, as the Standard and Poor’s 500 Index lost 6.44% during the three-month period. However, there was a bunch of stocks that performed very strongly during that period. This article will lay out a list of five strong-performing stocks that were being dumped by the hedge fund investors tracked by Insider Monkey during the September quarter. To be more specific, our team pinned down five stocks that returned at least 15% during the latest quarter, so the following article will discuss the performance of these stocks since the beginning of October in an attempt to find out whether smart money investors made the right decision.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

#5 ABIOMED Inc. (NASDAQ:ABMD)

-Investors with Long Positions (as of September 30): 22

-Aggregate Value of Investors’ Holdings (as of September 30): $433.83 Million

The number of smart money investors with positions in ABIOMED Inc. (NASDAQ:ABMD) declined to 22 from 29 during the third quarter, but the funds we track still held 11.10% of the company’s outstanding common stock at the end of September. The shares of the provider of mechanical circulatory support devices had gained 143% through the end of September, after advancing 41% during the third quarter. It appears that some hedge fund decided to take some profits off the table and they made the right move by doing so. The stock is down 14% so far in the fourth quarter, even though the company posted better-than-expected financial results for its second fiscal quarter. ABIOMED reported earnings of $0.17 per share on revenue of $76.4 million, while analysts anticipated EPS of $0.16 on revenue of $74.59 million. The market reacted negatively to the strong earnings report, and some traders attributed the sell-off to profit taking. Allegedly, some market participants believe that ABIOMED’s growth story is not as tempting as it has been before. At the end of the day, the company’s Impella heart pump product is a one-time-purchase product, while ABIOMED’s core growth strategy only involves the market penetration of its family of Impella products (there are not so many people ABIOMED can sell its products to). William Leland Edwards’ Palo Alto Investors upped its position in ABIOMED Inc. (NASDAQ:ABMD) by 4% during the third quarter to 2.83 million shares.

#4 JetBlue Airways Corporation (NASDAQ:JBLU)

-Investors with Long Positions (as of September 30): 42

-Aggregate Value of Investors’ Holdings (as of September 30): $714.19 Million

JetBlue Airways Corporation (NASDAQ:JBLU) also lost its charm among the hedge funds monitored by the Insider Monkey team during the third quarter, as the number of smart money investors with stakes in the company dropped to 42 from 50 quarter-on-quarter. The stock performance of the passenger carrier company in the fourth quarter appears to suggest that some hedge funds made the right choice by selling out their holdings in the company, but many believe that the low-cost carrier is set to grow even further. JetBlue’s stock declined 4% so far in the current quarter, but it is still 55% in the green year-to-date. The company has a trailing price-to-earnings ratio of 15.32, which is significantly below the median of 23.28 for the companies included in the S&P 500 benchmark. The significant decline in aircraft fuel expenses resulted in a decrease of 11.2% in operating expense per available seat mile in the third quarter. David Tepper’s Appaloosa Management holds a 4.49 million-share position in JetBlue Airways Corporation (NASDAQ:JBLU) as of September 30.

#3 Reynolds American Inc. (NYSE:RAI)

-Investors with Long Positions (as of September 30): 33

-Aggregate Value of Investors’ Holdings (as of September 30): $1.95 Billion

A number of 33 hedge funds from our database had positions in Reynolds American Inc. (NYSE:RAI) at the end of the third quarter, compared with 41 registered at the end of the prior one. The nation’s second-largest tobacco company has seen its shares gain 41% this year, after advancing 19% during the third quarter. The fourth quarter has not been bad either in terms of stock performance, with Reynolds American’s shares gaining slightly more than 2% thus far. Reynolds American has three reportable operating segments, which include RJR Tobacco (generated 83% of the company’s third-quarter net sales), Santa Fe and American Snuff. In the tobacco industry, the performance of each company and brand performance is primarily assessed by looking at their market share in the industry. RJR Tobacco’s domestic cigarette share of retail shipments added up to 32.0% in the third quarter, compared with 31.8% in the same quarter last year. Reynolds American delivered strong revenue growth as well during the third quarter, as its net sales came to $3.16 billion for the quarter, up from $2.24 billion reported last year. Neil Woodford’s Woodford Investment Management acquired a new stake of 16.41 million shares in Reynolds American Inc. (NYSE:RAI) during the September quarter.

#2 Chipotle Mexican Grill Inc. (NYSE:CMG)

-Investors with Long Positions (as of September 30): 28

-Aggregate Value of Investors’ Holdings (as of September 30): $1.10 Billion

The number of smart money investors with long positions in Chipotle Mexican Grill Inc. (NYSE:CMG) shrank to 28 from 36 during the June-September period. A handful of hedge funds monitored by Insider Monkey cashed out all their holdings in the fast-casual restaurant chain at the right time, as the stock has been steadily sliding since mid-October as a result of an E. coli outbreak in Washington state and Oregon. In fact, the stock has lost 21% since the beginning of the current quarter and is down 17% for the year. It appears that the popular fast casual Mexican chain is having a hard time overcoming the recent food-related scandal, as it created a substantial negative consumer reaction. However, the shares of Chipotle are still trading at a rich trailing P/E ratio of 34.27 in spite of the recent pullback. Jim Simons’ Renaissance Technologies increased its exposure to Chipotle Mexican Grill Inc. (NYSE:CMG) by 53% during the third quarter to 479,400 shares.

#1 WEC Energy Group Inc. (NYSE:WEC)

-Investors with Long Positions (as of September 30): 14

-Aggregate Value of Investors’ Holdings (as of September 30): $57.07 Million

WEC Energy Group Inc. (NYSE:WEC) also failed to appeal the hedge fund industry during the September quarter. Actually, only 14 hedge funds observed by our team were invested in the company at the end of the third quarter, compared with 26 at the end of the previous one. Leaving all the hatred towards hedge funds aside, one should acknowledge that several smart money investors were correct on this stock as well. The shares of the energy company have lost 8% thus far in the fourth quarter, after gaining 16% during the third quarter. Earlier today, the company announced its intentions to raise its quarterly dividend to $0.495 per share in the first quarter of 2016, which denotes an increase of 3.75% over the current dividend. At the same time, WEC Energy’s management aims at targeting a dividend payout ratio of 65%-to-70% of earnings. Stuart J. Zimmer’s Zimmer Partners owns 349,000 shares of WEC Energy Group Inc. (NYSE:WEC) as of September 30.

Disclosure: None