Hedge Funds Regret Selling These Soaring Stocks: Part 1

Hedge funds aren’t perfect. They sometimes miss out on big opportunities or leave a stock too early before a big trend begins. In this article, we take a closer look at CBS Corporation (NYSE:CBS), Baidu Inc (ADR) (NASDAQ:BIDU), Thermo Fisher Scientific Inc. (NYSE:TMO), Dow Chemical Co (NYSE:DOW), and Applied Materials, Inc. (NASDAQ:AMAT), five stocks that many hedge funds may regret selling given their big gains in recent months.

Given that Insider Monkey has done a lot of research into what the smart money likes and doesn’t like, let’s also analze relevant hedge fund sentiment toward the stocks. Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#5 Thermo Fisher Scientific Inc. (NYSE:TMO)

– Number of Hedge Fund Holders (as of September 30): 52
– Total Value of Hedge Fund Holdings (as of September 30): $3.83 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 7.90%

Thermo Fisher Scientific Inc. (NYSE:TMO) has soundly beaten the S&P 500 since September 30, leaving the net 14 funds, including Jim Simons’ Renaissance Technologies and Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital that sold out of the stock in the third quarter a little disappointed. Shares of the healthcare and science equipment maker have rallied 10% in the past two-and-a-half months, partly because the company exceeded analyst third quarter revenue and profit expectations and partly because the stock is relatively cheap with a forward P/E of under 17. With healthcare and biotech science slated to become a bigger part of the economy over the next two decades, there is plenty of growth ahead. Among the bulls is Larry Robbins’ Glenview Capital, which owned 8.51 million shares as of the end of September

#4 Baidu Inc (ADR) (NASDAQ:BIDU)

– Number of Hedge Fund Holders (as of September 30): 52
– Total Value of Hedge Fund Holdings (as of September 30): $3.4 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 7.00%

Although the number of hedge funds long the Chinese search engine Baidu Inc (ADR) (NASDAQ:BIDU) declined to 52 at the end of the third quarter from 70 at the end of June, shares of the company have surged by 41% since September 30. Investors have become more optimistic on the stock as the Shanghai index has stabilized and is trending higher again. Meanwhile, Beijing continues to lower interest rates and enact market friendly reforms that will increase China’s middle class’ buying power over the next decade. If China’s middle class gets bigger, Baidu’s EPS will increase as well. Matt Sirovich and Jeremy Mindich‘s Scopia Capital owned 2.74 million shares at the end of the third quarter.

#3 Applied Materials, Inc. (NASDAQ:AMAT)

– Number of Hedge Fund Holders (as of September 30): 54
– Total Value of Hedge Fund Holdings (as of September 30): $1.6 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 8.80%

Applied Materials, Inc. (NASDAQ:AMAT) shares have rallied by almost 25% since the end of the third quarter as value investors step in to buy the stock’s at a forward P/E under 12 and as technical traders jump on to ride the trend. Although luminaries such as Larry Robbins’ Glenview Capital and David Einhorn’s Greenlight Capital own the stock, 11 fewer funds from our database reported stakes in the company, having sold out of their position from June 30 to September 30. Look for Applied Materials to do well once the semiconductor industry solves its oversupply problem.

#2 Dow Chemical Co (NYSE:DOW)
– Number of Hedge Fund Holders (as of September 30): 56
– Total Value of Hedge Fund Holdings (as of September 30): $5.59 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 11.40%

Because Dow Chemical Co (NYSE:DOW) announced that it will combine with E I Du Pont De Nemours And Co (NYSE:DD) in a merger-of-equals, its shares have surged by almost 25% since the end of the third quarter. Investors are salivating at the merger’s potential synergies, which management estimates to be as much as $3 billion within two years after the deal closes. A big winner in the deal is Dan Loeb’s Third Point, which owned 23.5 million shares of Dow Chemical at the end of September. However, during the third quarter, the number of funds bullish on the stock declined by nine. Among the sellers was Glenn Russell Dubin’s Highbridge Capital Management that sold out its position during the third quarter.

#1 CBS Corporation (NYSE:CBS)

– Number of Hedge Fund Holders (as of September 30): 62
– Total Value of Hedge Fund Holdings (as of September 30): $3.46 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 18.00%

Given that 21 analysts covering CBS Corporation (NYSE:CBS) have a ‘Buy’ rating, two have a ‘Strong Buy’ rating, and four have ‘Hold’ ratings, with an average price target of $61.63 among them,  it’s not surprising that CBS shares have appreciated by over 16% since the end of September. What is surprising is that the smart money, including Millennium Management Subsidiary’s Blue Arrow Capital Management missed it, as the total number of elite funds long the diversified media company declined by nine to 62 between July and September. If ad spending in this Presidential election cycle exceeds expectations, CBS may rally even further.

Disclosure: none