Were Hedge Funds Right Betting On These Stocks in Q4?

In the third quarter of 2015 that – owing to the turmoil in the Chinese markets – equity markets across the world saw a large scale sell-off, which had a negative impact on the returns of US stocks for the whole 2015. Nevertheless, most smart money investors remained confident and decided to stick to most of their long positions, betting on their rebound and long-term growth. Since we at Insider Monkey constantly track the most prominent names in the hedge fund industry and the moves made by them, we also keep a tab on the stocks that are popular among those funds. During the third quarter of 2015 when stocks got beaten down, there were a few companies whose shares were being lapped up by hedge funds. In this article, we will take a look at the five stocks that ranked as the most popular among the funds we track and see their performance in the last quarter of 2015 as well as see what the near future might hold for them.

Imitating hedge funds and other institutional investors can help identify some of the most profitable stocks on the market. However, our extensive research that covered the period between 1999 and 2012, showed that the best approach is to follow these investors into their small-cap stocks. Our backtests showed that the 15 most popular small-cap stocks among hedge funds managed to generate a monthly alpha of 81 basis points, versus an alpha of 0.7 percentage points posted by their top 50 large-cap picks (see the details here).

#5 Citigroup Inc (NYSE:C)

-Hedge Funds with Long Positions (as of September 30): 121

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $10.32 billion

Shares of Citigroup Inc (NYSE:C) got hit hard during the third-quarter sell-off and didn’t manage to recover throughout the end of 2015, losing nearly 5% during the last year. However, in the last three months of 2015, the stock gained around 6%, propelled by the Fed’s decision to raise interest rates. The beginning of 2016, though, saw Citigroup’s shares plunging by more than 20%, amid the company reporting its financial results for the last quarter and the full year 2015.

Citigroup posted EPS of $1.02 and revenue of $18.5 billion for the fourth quarter of 2015. Adjusted for CVA/DVA, the revenue amounted to $18.6 billion, while EPS stood at $1.06, which managed to beat the estimates of $17.87 billion and $1.05, respectively. For the full year, Citigroup delivered net income of $17.2 billion on revenue of  $76.4 billion.

Among the funds that didn’t make any changes to their stakes in the company during the third quarter was billionaire Dan Loeb‘s Third Point, which continued to own 20 million shares of Citigroup at the end of September.

#4 Facebook Inc (NASDAQ:FB)

-Hedge Funds with Long Positions (as of September 30): 128

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $8.95 billion

Facebook Inc (NASDAQ:FB)’s stock continued its bull run in the fourth quarter of 2015, ending the quarter up by 16.42%. Though the stock has suffered some decline since the start of 2016 and has gone below the $100 mark, it is still trading above the highs that it made during the third quarter of 2015. This means that the bet made by all the funds that were long on the stock at the end of the third quarter has paid off quite well, especially when one takes into account the performance of the broader market.

According to Piper Jaffray’s analyst Gene Munster, 2016 will be the year of virtual reality and Facebook Inc (NASDAQ:FB) with its VR platform ‘Oculus Rift’ will emerge as a dominant player in this industry. However, Munster also warns investors not to expect any miracle in terms of revenue or profit from Facebook’s virtual reality division anytime soon as people are still adapting to this new technology. Munster currently has a ‘Buy’ rating with a $155 price target on Facebook’s stock.

Facebook is expected to report its fiscal 2015 fourth quarter results by the end of this month. Analysts estimate that the company will report EPS of $0.68 on revenue of $5.36 billion for the quarter, significantly better than the EPS of $0.54 on revenue of $3.85 it had reported for the same quarter last year. Stanley Druckenmiller‘s Duquesne Capital more than doubled its stake in the company to slightly over 4 million shares during the third quarter.

#3 Alphabet Inc (NASDAQ:GOOGL) (Class A)

-Hedge Funds with Long Positions (as of September 30): 129

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $11.3 billion

Alphabet Inc (NASDAQ:GOOG) (Class C)

-Hedge Funds with Long Positions (as of September 30): 119

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $10.18 billion

The second half of 2015 marked the period in which both classes of Alphabet’s stock broke their two year monotonous phase and shot through the roof. After rising by 18.20% and 16.88%, respectively, during the third quarter, Alphabet’s class A and class C stocks again jumped by 21.87% and 24.73%, respectively, during the fourth quarter largely led by the great results the company reported during these periods. At the same time, during the third quarter, the number of funds long Alphabet’s class C stock went up by 12, and 14 more funds reported bullish stakes in the company’s class A stock.

In spite of this rapid rise, shares of Alphabet are currently trading at a forward price-to-earnings multiple of 20.97, which although might seem a little rich when taken at face value, but is significantly lower compared to where a lot of tech and internet stocks currently trade at. According to a recent report from eMarketer, revenue from display ads will overtake revenue from search ads in 2016. Experts believe that even though this shift might not be an imminent problem for Alphabet, it can become a cause of concern for the company going forward.

On December 28, analysts at Axiom Securities reiterated their ‘Buy’ rating on Alphabet’s stock, while upping their price target to $1,000 from $900. Andreas Halvorsen‘s Viking Global reduced its stake by 8% to 2.53 million class A shares and trimmed its class C position by 2% to 1.12 million shares during the third quarter of 2015.

#2 Apple Inc. (NASDAQ:AAPL)

-Hedge Funds with Long Positions (as of September 30): 133

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $17.41 billion

After suffering a 11.6% decline during the third quarter, shares of the tech behemoth Apple Inc. (NASDAQ:AAPL) again fell by 4.57% during the third quarter. Perhaps some of the hedge funds had already anticipated this dismal performance of the stock and that’s why the ownership of the company among funds covered by us declined during the third quarter.

Recently, Apple Inc. (NASDAQ:AAPL)’s stock went down below the psychologically-important $100 mark for the first time in 14 months and technical analysts believe that this could push the stock even lower in the near future. Fundamental analysts seem to agree with their technical counterparts, as, on January 11, several analysts lowered their price target on the stock. Among them were analysts at Deutsche Bank,  who reiterated their ‘Hold’ rating, while lowering their price target to $105 from $120.

Famous activist investor Carl Icahn – who is the largest shareholder of Apple with ownership of over 52 million shares – announced last October that he plans to launch a super PAC to reform corporate taxes in the US. Experts believe that if Mr. Icahn’s super PAC is able to achieve its plans, it will pave way for Apple to bring back billions of dollars stashed abroad without paying excessive tax and return it to shareholders.

#1 Allergan plc Ordinary Shares (NYSE:AGN)

-Hedge Funds with Long Positions (as of September 30): 151

-Aggregate Value of Hedge Funds’ Holdings (as of September 30): $20.47 billion

The popularity of Allergan among the investors we track remained unchanged during the third quarter, when its stock fell by over 10%. All 151 funds were handsomely rewarded in the fourth quarter with shares of the company appreciating by almost 15%.

Most of the gains of Allergan plc Ordinary Shares (NYSE:AGN)’s stock came in October, when rumors started flowing that drug giant Pfizer Inc. (NYSE:PFE) was interested in acquiring the company. On November 24, Pfizer Inc. (NYSE:PFE) announced that it would acquire Allergan for $160 billion and shift its headquarters to Ireland. Ever since the announcement was made, several regulators and lawmakers have been opposing this merger arguing that such ‘inversion deals’ that help US-based corporations save taxes are ‘unpatriotic’.

Most analysts who cover Allergan are bullish, having set an average price target of $366.40. For the fourth quarter of 2015 analysts expect the company to report EPS of $3.36 on revenue of $4.20 billion.

Disclosure: None