Hedge Funds Regret Buying These Stocks in Q4

Hedge funds are able to charge their clients high fees because of their ability to deliver superior returns and outperform benchmarks. However, this doesn’t mean that they are infallible stock pickers who don’t make mistakes, especially when considering short periods of time, as many of them have a long term focus. Nonetheless, in this article we’ll take a look at some of the stocks they were buying in the fourth quarter, which have suffered extremely poor runs to open the year. While many stocks have suffered losses in 2016 due to a decline in the overall market, these stocks have been pounded particularly hard. We decided to compile a list of five of these stocks and discuss their performance and future outlook, beginning with Yelp.

At Insider Monkey, we track more than 700 hedge funds, whose 13F filings we analyze as part of our small-cap strategy. Our research has shown that imitating a portfolio that includes the 15 most popular small-cap stocks among hedge funds can outperform the market by as much as 95 basis points per month on average (see more details here).

As mentioned, we’ll start with Yelp Inc (NYSE:YELP), which saw its ownership among the hedge funds in our system increase by 55.5% to 42 funds during the fourth quarter, while the aggregate value of their holdings in it swelled by 98% to $1.02 billion during the same period. At the end of December, these 42 hedge funds owned 47.10% of the outstanding shares of Yelp Inc (NYSE:YELP). Shares of the company were trading down by more than 45% year-to-date a few days ago, however they have rallied since then and now trade with losses of 27% for the year. For its fourth quarter, Yelp reported EPS of $0.11 on revenue of $153.70 million, both of which topped analysts’ projections, as they collectively anticipated Yelp to post a loss of $0.03 per share on revenue of $152.35 million. Yelp is currently in the midst of a controversy after it fired an employee for writing a blog slamming the sub-par salary the company pays to entry level employees. On February 19, analysts at Tigress Financial upgraded Yelp Inc (NYSE:YELP) to ‘Buy’ from ‘Neutral’ while maintaining their $18.38 price target on it. Sahm Adrangi‘s Kerrisdale Capital reduced its stake in the company by 55% to 338,561 shares during the fourth quarter.

LinkedIn Corp (NYSE:LNKD) has lost almost half of its market capitalization this year with more than 70% of that loss coming in a single day after the company reported its fourth quarter numbers and provided dismal guidance. During the fourth quarter, the number of hedge funds in our system with long positions in the stock increased to 48 from 38 and the aggregate value of their holdings also saw a 35.6% jump, to $2.40 billion. Though some market participants were surprised by the magnitude of the decline that LinkedIn Corp (NYSE:LNKD)’s stock suffered following the release of its fourth quarter financial results, others reasoned that this was bound to happen, as the sales of the company have been on a decline and it was trading at an unrealistic valuation. Moreover, some analysts also believe that the user engagement numbers the company released in previous few quarters were flawed and that those discrepancies are catching up to the company now in its results. On February 22, analysts at Goldman Sachs downgraded LinkedIn Corp (NYSE:LNKD) to ‘Buy’ from ‘Conviction Buy’, though they did still include the company in their list of top five Internet stocks to buy in 2016. Alex Snow‘s Lansdowne Partners increased its stake in the company by 6% to 1.24 million shares during the fourth quarter.

Head to page two to see the three other stocks which have disappointed bullish hedge funds in 2016.

Moving on, led by the news that media mogul Oprah Winfrey had acquired a minority stake in the company, shares of Weight Watchers International, Inc. (NYSE:WTW) rallied by nearly 270% during the fourth quarter. The news also served to increase hedge funds’ interest in the stock, as the ownership of the company increased to 24 from 14 among the investors in our database, while the aggregate value of their holdings in the company jumped by a whopping 934% to $263.95 million during the fourth quarter. However, the news and financial numbers coming out of the company this year have put Weight Watchers International, Inc. (NYSE:WTW) shares on a diet, as it trades down by over 40% year-to-date. The company recently reported a loss of $0.03 per share on revenue of $259.20 million for the fourth quarter, whereas the consensus among analysts was for it to report EPS of $0.03 on revenue of $257.21 million. Along with its earnings release, the company also revealed that its active subscribers declined by 4.8% year-over-year to 2.39 million and that the Oprah deal cost it $0.10 per share in expenses. Andrew Feldstein and Stephen Siderow‘s Blue Mountain Capital initiated a stake in the company during the fourth quarter; it held 2.00 million shares of Weight Watchers International, Inc. (NYSE:WTW) as of December 31.

The biotech sector has suffered a severe contraction during the recent turmoil in the stock market, and Alkermes Plc (NASDAQ:ALKS) has emerged as one of the worst performing stocks within that sector, losing over 58% of its value since the beginning of 2016. The final quarter of 2015 was a completely different story for Alkermes Plc (NASDAQ:ALKS)’s stock. Amid a 33% rise in the stock during that period, its ownership among the hedge funds that we follow climbed to 34 from 22 and the aggregate value of those hedge funds’ holdings soared to $795.5 million from $523.17 million. Although the stock had already given up all of the gains it made during the fourth quarter by January 19, it slumped further on January 20 after reports emerged that its drug for major depressive disorder did not meet its main goal of improving depression symptoms in two late-stage studies. On February 22, Goldman Sachs analysts reduced their target price on the stock to $35 from $53. Billionaire David E. Shaw‘s firm D.E. Shaw made a fifteen-fold increase to its stake in Alkermes Plc (NASDAQ:ALKS) during the October-to-December period, to 266,770 shares.

Wearables manufacturer Fitbit Inc (NYSE:FIT) was listed with heavy fanfare last year, but in less than a year its stock is trading more than 35% lower than its IPO price. It is also the only company in this list whose shares declined during the fourth quarter, by 20%. Nonetheless, it saw an increase in its popularity among the hedge funds in our system, which clearly anticipated a turnaround, as their ownership of the stock increased by seven to 20 funds, while the aggregate value of their holdings in it increased by 87.7% to $350.5 million. Though the company recently delivered an earnings and revenue beat for the fourth quarter, its shares failed to take off due to the lower guidance it provided for the first quarter of 2016, pushing Fitbit Inc (NYSE:FIT)’s stock down to trade at 58% in the red year-to-date. The unprecedented growth in shipments of the Apple Watch and the fears of the second version of the Apple Watch reducing Fitbit’s market share even further seem to be the main reasons why the company’s stock has fallen from a cliff over the past few months. Interestingly, Fitbit Inc (NYSE:FIT)’s stock has followed the same trajectory since August as the stock of another notable wearable manufacturer, GoPro Inc (NASDAQ:GPRO). Philippe Laffont‘s Coatue Management initiated a stake in Fitbit in the fourth quarter, purchasing over 1.5 million shares.

Disclosure: None