Hedge Funds Regret Selling These Stocks in Q4

Though the broader market is undergoing a correction this year, there are a few stocks which have managed to perform remarkably well despite the slump. It might look like an anomaly at first, but by and large, the reasons behind their outperformance are usually pretty obvious: being based on positive developments or news, or other catalysts. Of course, even the best investors don’t have a crystal ball and can’t always foresee the stocks that will deliver these good tidings in the near future. That’s why among some of the best performing stocks so far this year, there are a few names in which ownership of those stocks among hedge funds in our system declined noticeably during the fourth quarter. Having said that, in this article we will be focusing on the top five stocks that are doing well this year, but which witnessed a decline in their popularity among the more than 800 hedge funds covered by us during the fourth quarter.

At Insider Monkey, we track more than 800 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).

#5 Swift Transportation Co (NYSE:SWFT)

– Investors with Long Positions (as of December 31): 25

– Aggregate Value of Investors’ Holdings (as of December 31): $365.95 million

Let’s start with Swift Transportation Co (NYSE:SWFT), whose shares are trading up by 20.55% year-to-date, led by its fourth quarter earnings beat. During the fourth quarter, the ownership of the company among funds covered by us declined by 13. However, the aggregate value of hedge funds’ holdings in it did increase by 36.37% during the same period, even as the stock price declined, so clearly there were at least a few very bullish investors who did anticipate something positive on the horizon. For the fourth quarter, Swift Transportation Co (NYSE:SWFT) reported EPS of $0.53 on revenue of $1.09 billion, beating analysts’ expectations of EPS of $0.47, but missing on revenue expectations of $1.12 billion. Despite the rise in its stock this year, Swift Transportation Co is currently trading at a cheap forward P/E of 9.51. On February 29, analysts at JPMorgan Chase & Co. initiated coverage on the company’s stock with a ‘Neutral’ rating and $16 price target. Steve Cohen‘s Point72 Asset Management reduced its stake in the company by 78% to 577,800 shares during the fourth quarter.

#4 Macy’s, Inc. (NYSE:M)

– Investors with Long Positions (as of December 31): 51

– Aggregate Value of Investors’ Holdings (as of December 31): $1.16 billion

After losing almost half of its market capitalization during the second-half of 2015, Macy’s, Inc. (NYSE:M)’s stock has rebounded swiftly this year and currently trades with year-to-date gains of 28.3%. Investors covered by us with long positions in the stock declined by 16 during the fourth quarter and the aggregate value of their holdings saw a drop of $434 million, which was due to the stock’s depreciation during the quarter. Shares of the largest department store operator in the U.S started rallying in January after David Einhorn-led Greenlight Capital revealed a large stake in the company and Mr. Einhorn speculated that due to its undervaluation,Macy’s could be a takeover target by private equity firms. Moreover, the fourth quarter numbers that the company released recently has added fuel to this rally. Whereas the Street had expected it to report EPS of $1.89 on revenue of $8.83 billion for the quarter, Macy’s, Inc. (NYSE:M) declared EPS of $2.09 on revenue of $8.87 billion. At the end of December, Greenlight Capital held nearly 6.74 million shares of the company.

#3 Alere Inc (NYSE:ALR)

– Investors with Long Positions (as of December 31): 30

– Aggregate Value of Investors’ Holdings (as of December 31): $1.06 billion

Medical diagnostics company Alere Inc (NYSE:ALR) saw its shares skyrocket in early February after Abbott Laboratories (NYSE:ABT) announced that it will acquire the former for $5.8 billion or $56 per share. Following this announcement, several investors raised concerns that Abbott Laboratories is paying too much for Alere Inc (NYSE:ALR), considering the latter’s flat earnings growth and poor net profit margins. However, their concerns were put to rest by Abbott Laboratories’ CEO, who explained that though Alere might be not worth that much to any other buyer, Abbott has an asymmetric advantage in buying it and hence the price it is paying is justified. During the October-to-December period, the ownership of Alere among funds covered by us declined by nine and the aggregate value of their holdings in it also slid by $288 million. Among the funds which boosted its stake in Alere during the fourth quarter was D.E. Shaw, founded by billionaire David E. Shaw, which increased its holding by 20% to 1.12 million shares.

#2 Groupon Inc (NASDAQ:GRPN)

– Investors with Long Positions (as of December 31): 20

– Aggregate Value of Investors’ Holdings (as of December 31): $103.3 million

Two back-to-back positive developments in February have caused Groupon Inc (NASDAQ:GRPN)’s stock to soar by 55% so far this year. First, the company managed to beat analysts’ fourth quarter expectations of a loss of $0.05 per share on revenue of $846.59 million by declaring EPS of $0.04 on revenue of $917.17 million. A day after that, Alibaba Group Holding Ltd (NYSE:BABA) revealed in a regulatory filing that at the end of December it owned 5.6% of the outstanding shares of Groupon Inc (NASDAQ:GRPN). Following this revelation, the Street has been rife with speculation that Alibaba will acquire the company soon to expand its footprint in the U.S. The 22 prominent analysts who cover Groupon’s stock currently have an average rating of ‘Hold’ on it with an average price target of $3.68, which represents a potential downside of 22.7% from the stock’s current price. Alexander Tamas‘ Vy Capital was one of the hedge funds that initiated a stake in the company during the fourth quarter, however there were six fewer investors with long positions in the stock by the end of the fourth quarter.

#1 J C Penney Company Inc (NYSE:JCP)

– Investors with Long Positions (as of December 31): 27

– Aggregate Value of Investors’ Holdings (as of December 31): $272.6 million

J C Penney Company Inc (NYSE:JCP) is another retail company that has made it on to this list, as the sector is one of the few that is enjoying a strong 2016. The number of investors covered by us who were long the stock declined by eight during the fourth quarter, while the aggregate value of their holdings in it decreased by 35.7%. Due to continued improvements in its operational efficiency, the company reported spectacular fourth quarter numbers and issued upbeat guidance for fiscal year 2016 recently. That led its shares to break their 52-week high and they now trade with year-to-date gains of nearly 69%. Prior to the earnings release, the consensus among analysts was for the company to report EPS of $0.23 on revenue of $3.99 billion. However, J C Penney Company Inc (NYSE:JCP) blew their earnings estimates out of the water by declaring EPS of $0.40 on revenue of $4.00 billion. On March 3, analysts at Evercore ISI upgraded the stock to ‘Buy’ from ‘Hold’ and also raised their price target on it to $15 from $8. Billionaire Jim Simons of Renaissance Technologies increased its stake in the company by 23% to almost 18.00 million shares during the fourth quarter.

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