Hedge Funds Were Fleeing From These 5 Stocks In Q3

The third quarter was a rough period for even the greatest of investors, as the S&P 500 declined by more than 6% and the majority of stocks ended the quarter worse off than when they started it. Such market turbulence causes investors to reassess their stock picks and their appetite for risk, and after pouring through the data from the latest round of 13F filings, we pinpointed five stocks in which the smart money investors that we track were collectively fleeing from. Let’s uncover these stocks and see why the smart money has lost faith in them.

#5 Yelp Inc (NYSE:YELP)

 – Elite Investors with Long Positions (as of September 30): 27

 – Aggregate Value of Elite Investors’ Holdings (as of September 30): $516.23 million

 – Percentage of Shares Owned by Elite Investors (as of September 30): 31.70%

First up is Yelp Inc (NYSE:YELP), the business review aggregator website that has not been getting very good reviews itself of late. After nearly hitting $100 in March 2014, shares have lost about 70% of their value since then as Yelp has been embroiled in controversy over its practices and usage has stagnated. Things hit rock-bottom early in the third quarter when Yelp seemingly couldn’t even find a buyer for itself, as it announced that it would no longer seek to sell itself. Shares fell by 10% immediately following the announcement, and continued to trend down throughout the remainder of the third quarter. That led to a net 17 investors that we track leaving the stock in the third quarter, as shares fell by 50%. Among those to sell off their Yelp Inc (NYSE:YELP) stakes in the quarter were billionaire Daniel Och of OZ Management, Matthew Halbower’s Pentwater Capital, and James Dinan‘s York Capital Management.

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

 – Elite Investors with Long Positions (as of September 30): 52

 – Aggregate Value of Elite Investors’ Holdings (as of September 30): $3.40 billion

 – Percentage of Shares Owned by Elite Investors (as of September 30): 7.00%

The third quarter was particularly hard on Chinese stocks, both at home and in the U.S, and that was reflected in the flight of shareholders from Baidu Inc (ADR) (NASDAQ:BIDU) during the quarter, as 18 less investors in our database held the stock by the end of the quarter. However, the investors that we track collectively held about the same amount of shares as they did at the start of the quarter, so there was an equal amount of share buying by those who held the stock as there was selling by those who vacated it. As the greater than 30%  decline in Baidu Inc (ADR) (NASDAQ:BIDU) shares during the quarter was largely macroeconomic-related, those investors who remained bullish on China likely also remained bullish on Baidu. Notably, billionaires Louis Bacon and George Soros, whom we had previously identified as loving Baidu, both sold out of the stock in the third quarter.

Whether elite hedge funds collectively like a stock or not is an important metric to consider, as these large investors show a great level of skill and expertise when it comes to picking stocks. Over the last few years equity hedge funds have trailed the market by a large margin, but that’s mostly due to their hedging and short positions, which perform poorly in a bull market. Their long positions performed far better, especially their small-cap picks, which have the potential to beat the market by 95 basis points per month on average, as our backtests showed. Our small-cap strategy involves imitating a portfolio of the 15 most popular small-cap picks among hedge funds and it has returned 102% since August 2012, beating the S&P 500 ETF (SPY) by over 53 percentage points (read more details here).

One of the worst performing stocks of the year kicks off the next page as we check out the top three stocks that the smart money fled from last quarter.

#3 Sunedison Inc (NYSE:SUNE)

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

 – Aggregate Value of Elite Investors’ Holdings (as of September 30): $10.57 billion

 – Percentage of Shares Owned by Elite Investors (as of September 30): 46.80%

Shares of Sunedison Inc (NYSE:SUNE) have crumbled by 85% this year, and by more than 90% since the middle of July, when liquidity concerns reared their very ugly head in the company’s direction. The company is now valued at just $1 billion, with JPMorgan Chase & Co. (NYSE:JPM) noting that it’s now priced as if a bankruptcy is imminent, which it does not believe will happen. Nonetheless, it has downgraded the stock to ‘Neutral’ from ‘Overweight’. On the other hand, Deutsche Bank AG (USA) (NYSE:DB) recently reiterated its ‘Buy’ rating and has a $16.00 price target on it, representing substantial upside of over 400%. While the hedge funds that we track do still own 46.80% of Sunedison Inc (NYSE:SUNE)’s shares, there were 20 less shareholders of the company in our database by the end of the third quarter. Dan Loeb, Richard Driehaus, and Dmitry Balyasny were among the investors getting out of SunEdison in the third quarter.

#2 Twitter Inc (NYSE:TWTR)

 – Elite Investors with Long Positions (as of September 30): 27

 – Aggregate Value of Elite Investors’ Holdings (as of September 30): $248.32 million

 – Percentage of Shares Owned by Elite Investors (as of September 30): 1.40%

Twitter Inc (NYSE:TWTR) also had 20 less shareholders by the end of the third quarter than it did at the start of it, but unlike SunEdison, the investors we track are also quite bearish in general towards the social media company, owning just 1.40% of its shares now. After a big dip in the second quarter, Twitter shares fell again in the third quarter, as investors continue to worry about Twitter’s stagnant user growth. On the other hand, the company has begun to do a better job monetizing its service, with revenue continuing to make strong (though slowing) year-over-year leaps. Nonetheless, there don’t seem to be many catalysts for growth for the stock unless Twitter can find ways to attract more users to its service. Israel Englander’s Millennium Management and Jim Simons’ Renaissance Technologies were two of the firms to sell out of Twitter Inc (NYSE:TWTR) last quarter.

#1 Alibaba Group Holding Ltd (NYSE:BABA)

 – Elite Investors with Long Positions (as of September 30): 60

 – Aggregate Value of Elite Investors’ Holdings (as of September 30): $3.79 billion

 – Percentage of Shares Owned by Elite Investors (as of September 30): 2.60%

Lastly is Alibaba Group Holding Ltd (NYSE:BABA), which has fallen a long way from the 110 investors that held its shares shortly after its record IPO last year. That number fell by 25 to 60 in the latest quarter, as fears of a slowing China coupled with what had already been underwhelming numbers for Alibaba this year caused many investors to head for the exits. Among them was billionaire David Tepper, who made a quick reversal on the stock and got rid of it just one quarter after adding it to his portfolio. Jeffrey Smith’s Starboard Value also sold off its Alibaba Group Holding Ltd (NYSE:BABA) stake, and after pressuring Yahoo! Inc. (NASDAQ:YHOO) to do the same with its large stake, has recently come out and said that it should hold on to the position due to its decline in value and the uncertainty of whether or not the sale would be taxed. Starboard Value still owns 7.10 million Yahoo shares.

Disclosure: None