In this article we look at why Hedge Funds Were Right About These 10 Sinking Stocks. Click to skip ahead and see why Hedge Funds Were Right About These 5 Sinking Stocks.
Snap Inc. (NYSE:SNAP), Bed Bath & Beyond Inc. (NASDAQ:BBBY), and Coinbase Global, Inc. (NASDAQ:COIN) are among the worst performing stocks of 2022. They’re also stocks that hedge funds have been bailing on in droves during recent quarters.
To be fair, it wouldn’t be hard to compile a list of sinking stocks that hedge funds have been wisely ditching in recent quarters. After all, the vast majority of stocks are down year-to-date, many of them by double digits.
The S&P 500 has fallen by 13.8% year-to-date, while the Nasdaq has fared even worse, cratering by 21.7%. The vast majority of industries and sectors are down as well, with the energy and utilities industries being the lone outperformers this year.
The communication services industry has been the worst of the bunch, losing 28% year-to-date, being heavily dragged down by the movies and entertainment (-47.1%), cable and satellite TV (-28.1%), and interactive media services (-30%) sectors. Video gaming has been the lone industry bright spot this year, gaining 5.1%
The real estate sector has lost nearly 15% of its value this year, being led down by office REITs, which have lost 24% year-to-date, and real estate services stocks, which have lost 21%. Hotel and resort REITs has been the industry’s only positive sector contributor this year, gaining 2.4%.
The materials industry has gotten strong performances from steel and fertilizer stocks in 2022, but that hasn’t been nearly enough to offset the 20%+ losses from copper, gold, specialty chemicals, and construction materials stocks.
Retail stocks have also been battered pretty much across the board this year, with several of them landing on this list. The consumer discretionary retail composite is down by just over 20%, with apparel retailers (-22.2%), specialty stores (-23%), and casino and gaming (-29.6%) all being hit particularly hard.
Needless to say, it hasn’t been a fun year for most investors. Leading hedge funds at least spared themselves some excess carnage by selling off the following ten sinking stocks, all of which have lost at least 49% this year.
Photo by Joshua Hoehne on Unsplash
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All hedge fund data is based on the exclusive group of 900+ funds tracked by Insider Monkey that filed 13Fs for the Q1 2022 reporting period. We follow hedge funds because Insider Monkey’s research has uncovered that their consensus stock picks can deliver outstanding returns.
Hedge Funds Were Right About These 10 Sinking Stocks
10. Abercrombie & Fitch Co. (NYSE:ANF)
Number of Hedge Fund Shareholders: 26
Year-to-Date Returns: -49.1%
Snap Inc. (NYSE:SNAP), Bed Bath & Beyond Inc. (NASDAQ:BBBY), and Coinbase Global, Inc. (NASDAQ:COIN) are among the worst performing stocks of the year, a dubious list that Abercrombie & Fitch Co. (NYSE:ANF) can also lay claim to, as the company’s shares have imploded by 49% in 2022.
Several hedge funds spared themselves those deep losses, as ownership of Abercrombie & Fitch Co. (NYSE:ANF) has declined over each of the last three quarters, falling by 19% during that time. Jinghua Yan’s TwinBeech Capital and Noam Gottesman’s GLG Partners sold off their ANF stakes during the fourth quarter.
Abercrombie & Fitch Co. (NYSE:ANF) has bold plans to grow its business substantially in the coming years, projecting $4.2 billion in its fiscal 2025 revenue at the midpoint of its estimate, eventually reaching $5 billion further down the road. It believes it can achieve the latter revenue figure while also maintaining an operating margin of at least 10%.
While the company’s revenue growth rate was impressive during its 2022 fiscal year, that was against the soft pandemic comps. Going further back, ANF has only been able to raise its revenue by 6.3% since 2018. It will need to significantly improve upon that rate to have any chance of reaching its FY 25 goals.
9. Guardant Health, Inc. (NASDAQ:GH)
Number of Hedge Fund Shareholders: 33
Year-to-Date Returns: -47.4%
After hitting an all-time high in the fourth quarter of 2020, hedge fund ownership of Guardant Health, Inc. (NASDAQ:GH) has dropped precipitously over the five quarters since, falling by 38%. Several prominent money managers unloaded GH from their 13F portfolios in Q1, including New York Mets owner Steve Cohen, popular tech investor Cathie Wood, and billionaire Philippe Laffont.
Guardant Health, Inc. (NASDAQ:GH) grew revenue by 22% to $96.1 million during the first quarter, but the biotech’s losses nonetheless widened to $123.2 million, or $1.21 per share. It fared slightly better in Q2, as its loss per share narrowed to $1.00, while revenue rose to $109.1 million, beating estimates.
More importantly, Guardant Health, Inc. (NASDAQ:GH) revealed that its screening test for stage II/III colorectal cancer, Guardant Reveal, has been approved for Medicare coverage. Given the testing’s unique method, which doesn’t require tissue, Piper Sandler analyst David Westenberg believes it could carve out a healthy chunk of the multibillion dollar colorectal screening market. Westenberg has an ‘Overweight’ rating and $65 price target on the stock.
8. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Shareholders: 204
Year-to-Date Returns: -53.1%
While Meta Platforms, Inc. (NASDAQ:META) remains one of the most popular stocks among hedge funds, there’s been an undeniable flight from the stock over the past three quarters, with 26% fewer hedge funds long META on March 31 than there were on June 30. Louis Bacon’s Moore Global Investments sold off its META stake during Q3.
It’s not hard to see why hedge funds have been losing faith in Meta Platforms, Inc. (NASDAQ:META). The social media giant suffered its first-ever year-over-year revenue decline in Q2 and while its earnings power remains strong, it even disappointed on that front during the quarter. Its Metaverse division Reality Labs continues to be a huge drain on the company’s resources, losing $2.8 billion in the latest quarter. Meta’s various initiatives like Reels have also failed to catch fire like the company was hoping.
Moon Capital Management took a deep dive into Meta Platforms, Inc. (NASDAQ:META)’s current challenges and opportunities in its Q2 2022 investor letter:
“For most of the past decade, Meta’s share price has marched almost lockstep with its meteoric rise in earnings and free cash flow. That was until almost a year ago. Since August 2021, Meta shares have dropped more than 50 percent, while its free cash flow has increased 60 percent.
While Meta is facing certain headwinds related to changes in Apple’s latest operating system release (iOS 14’s optional identifier for advertisers (IDFA) blocking) that impact Meta’s ability to track and thus effectively target its user base, we believe the company will be able to effectively mitigate these changes. Meta estimates that these changes will result in a $10 billion headwind in 2022. To the extent that the company solves the IDFA problem over time, improvements in returns on advertising spending could result in a partially recovery of revenue dollars that creates a future tailwind.
Meta is also spending aggressively on augmented and virtual reality through the company’s Reality Labs division. Meta’s vision is that, over the next decade, the expansion of virtual reality may create the next major computing platform after mobile. The company is investing heavily in this area, dedicating more than $10 billion per year in the form of operating expenses running through the income statement. While the company is currently being penalized for these investments, we think it is more appropriate to view these costs as free options, given that the plug can be pulled at any time if the investments don’t develop into meaningful revenue contributors.
Meta’s core advertising business is clearly entering a more mature phase of its life cycle – or, at least, it is no longer the tiny newcomer in the advertising industry. Meta is now a $120 billion-a-year business, more than ten times its size in 2010. Starting from a base of less than $2 billion in 2010, Meta’s revenues have grown more than 40 percent annually. While it is easier to produce 40 percent annual revenue gains with a $2 billion business than with a $120 billion one, we expect that Meta will continue to siphon ad spending from traditional broad-based, “shotgun approach” legacy ad platforms, such as newspaper, magazine, radio and television.”
7. Carnival Corporation & plc (NYSE:CCL)
Number of Hedge Fund Shareholders: 32
Year-to-Date Returns: -57.8%
Hedge funds have been doing more selling than buying of Carnival Corporation & plc (NYSE:CCL) in four of the last five quarters, with a 32% decline in ownership of the stock during that time. Cliff Asness’ AQR Capital and Sculptor Capital are some of the funds that have unloaded their stakes in Carnival Corporation in recent quarters.
The expectation that people would be chomping at the bit to travel once the lockdowns ended hasn’t exactly been borne out in reality, as Carnival Corporation & plc (NYSE:CCL)’s trailing 12-month revenue, which covers a full year since cruise ships were unmoored, is just $5.9 billion, not even close to the $20.2 billion the company pulled in during its fiscal 2019. The lack of sales has forced the company to engage in excessive promotional efforts to fill its cabins, which resulted in a $9.2 billion loss during that time.
Carnival doesn’t expect its occupancy to return to historical levels until its fiscal 2023, and those forecasts might be overly rosy given the current state of the economy and the ongoing political uncertainty. In the meantime, Carnival had to raise $1 billion by issuing over 100 million of its already-discounted shares to investors, which has further driven down their value.
6. Big Lots, Inc. (NYSE:BIG)
Number of Hedge Fund Shareholders: 12
Year-to-Date Returns: -58.1%
Bringing the first half of the list to a merciful conclusion is Big Lots, Inc. (NYSE:BIG), which has lost 58% year-to-date. There’s been a 53% drop in the number of hedge funds long BIG over the last three quarters, with Dmitry Balyasny’s Balyasny Asset Management and Louis Navellier’s Navellier & Associates being among the sellers.
Discount retailer Big Lots, Inc. (NYSE:BIG) hasn’t been able to capitalize on tightening purse strings like investors had hoped, as the company’s sales tumbled by 15.4% during its fiscal first quarter, to $1.37 billion. Comps came in at an ugly 17% and the company lost $0.39 per share after pocketing $2.62 per share in the year ago period.
Big Lots, Inc. (NYSE:BIG) said the bulk of the quarterly slowdown occurred in April, and cited the skyrocketing fuel costs, inflation, and lack of stimulus checks as possible explanations. The company expects more of the same in fiscal Q2, but is hopeful that it can return to flat year-over-year results by the second-half of its fiscal year.
Hedge funds were bailing on Snap Inc. (NYSE:SNAP), Bed Bath & Beyond Inc. (NASDAQ:BBBY), and Coinbase Global, Inc. (NASDAQ:COIN) just in time to avoid those stocks’ catastrophic 2022 losses. Check out all the details by clicking the link below.
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Disclosure: None. Hedge Funds Were Right About These 10 Sinking Stocks is originally published at Insider Monkey.
