The first quarter is over with S&P 500 Index funds returning around 0.9%. Unfortunately, several of the mega-cap stocks had double digit losses and disappointed investors. Alibaba Group Holding Ltd (NYSE:BABA) was the biggest loser with a total return of -19.9%. Bank of America Corp (NYSE:BAC) and Intel Corporation (NASDAQ:INTC) followed Alibaba Group Holding with losses of 13.7% and 13.2% respectively. United Parcel Service, Inc. (NYSE:UPS) and Microsoft Corporation (NASDAQ:MSFT) were also among the top five losers in the $100+ billion market cap category. United Parcel Service lost 12.2% whereas activist ValueAct Capital‘s big target Microsoft Corporation (NASDAQ:MSFT) declined 11.8%.
Insider Monkey tracks hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of 6 basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of 7 basis points per month between 1999 and 2012. These stocks were able to generate alpha because of their lower risk profile. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month. These stocks were slightly riskier, so their monthly alpha was 80 basis points (read the details here). We believe investors will be better off by focusing on small-cap stocks rather than large-cap stocks. However, risk-averse investors may also have a slight edge by focusing on hedge funds’ large-cap picks rather than investing in index funds.
Alibaba Group Holding Ltd (NYSE:BABA) was one of the 10 most popular stocks among hedge funds at the end of the third quarter. There were 110 hedge funds with bullish Alibaba positions right after its IPO. Hedge funds took advantage of the increase in Alibaba Group Holding’s shares during the fourth quarter, and a net 20 of those hedge funds completely sold out of their positions. Hedge funds managed by billionaires David Tepper and Leon Cooperman was among funds to do so. On the other end of that were billionaires Dan Loeb and James Dinan, who increased their positions massively during the quarter. Assuming that these billionaires haven’t bought or sold any of their 13F holdings, Dan Loeb’s stock picks at the end of 2014 delivered a total return of 3% despite the nearly 20% loss in its billion dollar Alibaba Group Holding Ltd (NYSE:BABA) bet. York Capital’s stock picks also fared better than the S&P 500 Index, returning 2.6%.
Bank of America Corp (NYSE:BAC) is one of Bruce Berkowitz’s concentrated bets. Bruce Berkowitz had nearly $1.8 billion invested (24% of his 13F portfolio) in the stock at the end of 2014. His 13F portfolio lost 0.8% during the quarter mostly because of the losses in Bank of America Corp (NYSE:BAC). Billionaires Ken Fisher and John Paulson were also among Bank of America Corp shareholders.
Billionaire Ken Fisher had the second largest positions in each of Bank of America and Intel Corporation (NASDAQ:INTC). Both of these stocks lost more than 13% during the quarter. Other value investors, First Eagle Investment Management and Pzena Investment Management, also bet big on Intel Corporation (NASDAQ:INTC) and got burned. Overall, Intel Corporation isn’t one of the 50 most popular stocks among hedge funds and its popularity declined even further preceding its double digit loss during the first quarter.
United Parcel Service, Inc. (NYSE:UPS) is even less popular than Intel Corporation (NASDAQ:INTC). There were only 38 hedge funds with a total investment of $2 billion in United Parcel Service, Inc. (NYSE:UPS) shares. Half of this amount came from just two investors: Greenhaven Associates and Bill & Melinda Gates Foundation, the latter of which was probably attracted to UPS’ 3% dividend yield. It isn’t uncommon for billionaire Bill Gates’ foundation to invest in stable dividend stocks. We believe dividend stocks will deliver better returns than long-term Treasury bonds over the next couple of decades.
The last stock in our list is Microsoft Corporation (NASDAQ:MSFT). ValueAct Capital had 22% of its 13F portfolio in the stock and they kept buying Microsoft shares during the first quarter as the shares plunged nearly 12%. Microsoft Corporation was one of the 10 most popular stocks among hedge funds at the end of December (see the complete list). Hedge funds had nearly $18 billion invested in the software giant. We usually don’t like mega-cap stocks unless they are the target of activist investors. We like the stock’s 3% yield and believe that ValueAct may deliver surprising gains in Microsoft Corporation (MSFT) shares as it did with Adobe.
Disclosure: None
