One way retail investors can keep tabs on “smart money” is by keeping an eye on hedge funds. With ample resources, connections, and investing skills, hedge funds may “know” something you do not. Keeping track of their latest moves, you may have a stronger chance of determining whether there’s opportunity ahead, or trouble ahead, with a particular stock. In fact, I just learned about seven stocks hedge funds are selling.
So, how do you figure out hedge fund buys and sells? It’s actually quite easy, although there’s a bit of a time lag. Each quarter, large institutional investors like hedge funds report their portfolio holdings in 13F filings with the U.S. Securities and Exchange Commission (US SEC). Many sites online track this 13F data and can provide you with insight into which stocks are net buys and net sells among hedge funds.
According to TipRanks.com, hedge funds decreased their Alibaba (NYSE:BABA) holdings by 12 million shares during the quarter ending Sep. 30. So far this year, the once high-flying Chinese e-commerce play, has fallen out of favor with Main Street and Wall Street investors alike. Due to the downturn among tech stocks, plus numerous headwinds in its home market, BABA stock has taken a 24% haircut so far this year. Sure, in the past month, BABA’s been bouncing back. However, this rebound, fueled in large part by hopes of China easing on its “zero Covid” restrictions, could soon reverse course.
A “reopening” for China, which could fuel an economic rebound, may not start to take shape until mid-2023. In the meantime, it may be wise to tread carefully with BABA, even as one can argue that shares (at 12.3 times forward earnings) sell at a heavily-discounted valuation. It’s high on the list of stocks hedge funds are selling.
Costco (NASDAQ:COST) is another popular retailer stock that hedge funds are selling. Between July 1 and Sep. 30, ownership of shares among hedge funds decreased by 1.8 million shares. To some, this may sound surprising.
After all, hasn’t the discount retail club operator held up well during this challenging environment? That may be true, based on the company’s reporting of double-digit sales and earnings growth last quarter, but perhaps there’s another factor convincing hedge funds to say farewell to COST stock: a rich valuation.
At current prices, COST sells for 33.9 times the estimated earnings for this fiscal year (ending Aug. 31). Costco’s monthly sales growth has been trending lower recently. A deceleration in earnings growth could soon follow. If this happens, it may become increasingly harder for this retailer to sustain such a premium valuation to peers, resulting in poor returns ahead for the stock.
Based on reports at the time, institutional investors loaded up on tech last quarter, especially in Sept. However, with hedge funds outflows totaling 24.8 million shares, Intel (NASDAQ:INTC) wasn’t one of the top names hedge funds were getting behind.
Put simply, this INTC stock exodus makes sense. Shares in the chipmaker have slumped significantly throughout the year, and for a good reason. The company’s fundamentals have deteriorated, due to both falling chip demand from the economic downturn, plus Intel’s loss of market share to Advanced Micro Devices (NASDAQ:AMD).
Worse yet, as Louis Navellier argued earlier this month, Intel is many years away from completing a (possibly) successful turnaround. In the meantime, the company’s profitability could drop further, due to the aforementioned negative factors. Don’t let the INTC’s low earnings multiple (14.6) and high dividend yield (5.1%) lead you to hold this bag with this likely value trap.
Palantir Technologies (PLTR)
The hedge fund community has also turned its back on Palantir Technologies (NYSE:PLTR). Hedge fund investors reduced their positions in the data analytics firm by 1.8 million shares during the preceding fiscal quarter. Hedge funds may have pounded the ‘sell’ button on PLTR stock, due to concerns about the impact of the economic slowdown on the company’s growth. If that were the case, the “smart money” made a wise move. When Palantir reported its Q3 numbers last month, revenue growth came in at the slowest pace in two years.
PLTR has traded sideways since the disappointing earnings news. The broad market rally in Nov. may have helped to soften the blow. Yet as the stock continues to trade at a frothy earnings multiple, another big dive may be in store, if severe growth deceleration continues.
Hedge funds have put down the phone on AT&T (NYSE:T). “Ma Bell” has become one of the stocks hedge funds are selling, with hedge fund positions in the telecom stock dropping to the tune of 5.5 million shares last quarter.
T stock may trade at a low valuation (7.3 times earnings), yet such a low valuation isn’t out of the ordinary among telecom stocks. Verizon (NYSE:VZ), for instance, trades for 7.31 times forward earnings. T’s dividend (5.84%), which was reduced last year, trails Verizon’s 7.04% dividend.
But what may be leading hedge funds to tune out AT&T may be the company’s continued giving off of “value trap” vibes. So far, restructuring moves like its media divestiture have failed to unleash value for shareholders. Despite positive signs like strong subscriber growth, “wait and see” may still be the best approach with T stock.
A 434,200 share reduction in hedge fund ownership may not sound like much, yet that figure may understate how much Wall Street’s heavy hitters are losing confidence in electric vehicle (EV) maker Tesla (NASDAQ:TSLA).
As a Motley Fool commentator discussed in November, numerous billionaire-managed hedge funds dumped or reduced their TSLA stock positions during the third quarter of 2022. These include Jim Simons’ Renaissance Technologies, Ken Griffin’s Citadel Advisors, and Israel Englander’s Millennium Management.
Interestingly enough, one of these hedge fund titans (Ken Griffin), has made a big bet on another major EV stock, Rivian (NASDAQ:RIVN). Last month, Luke Lango argued that big bets on RIVN by Griffin, along with George Soros and David Einhorn, may mean these investing legends also view Rivian as the top contender among possible “Tesla killers.” Rivian’s continued success could come at the expense of Tesla, both the company and the stock.
Trimming exposure by 11.1 million shares last quarter, Visa (NYSE:V) is another popular stock that has made the “stocks hedge funds are selling” list. That said, hedge funds may have made the wrong move dumping shares in the payment processing giant like they were going out of style.
As Barron’s argued back in Oct., recession worries with V stock may be overblown. Reporting growth during past downturns, V’s earnings could continue to grow during this current downturn. On a longer timeframe, forecasted double-digit earnings growth could pave the way for continued strong returns. Although shares have bounced back so far this quarter, it’s not as if the opportunity here has not come and gone. In short, the takeaway here may not be to follow the hedge fund world’s lead. Instead, you may want to follow Warren Buffett’s lead, and start accumulating a position in V stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.