As we head into the end of the year, hedge funds are feeling the pressure to create alpha -- the market-beating returns for which they are known. The sector has had the worse year since 1997, with overall gains of more than 5% in the first nine months of 2012, compared with the S&P 500's roughly 21% in the same period. Simply put, hedge funds are scrambling to achieve the typical performance that's their claim to fame. This means some of these funds are especially focused on the stocks they think will outperform the market for sure.
And you won't believe which two stocks they are after…
Yahoo! (Nasdaq: YHOO)
This Web stock has been ripping higher since the start of September. Legendary hedge fund manager David Einhorn, known for his amazing short selling skills, purchased 5 million shares of the stock in the third quarter. Interestingly, he had dumped his position in Yahoo! at the first of the year and then bought back into the company during the last quarter. Since then, shares have been climbing higher.
Yahoo was just placed on the Goldman Sachs (NYSE: GS) conviction "buy" list, which is a lofty position for any stock. Yahoo's new CEO Marissa Mayer has been accepted with open arms on Wall Street as the company continues to outperform other tech bellwethers such as Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOG).
What makes Yahoo very appealing right now is its share buyback program. This year alone, Yahoo has repurchased 54 million shares for $860 million. There is another $2.8 billion in profits from the sale of Yahoo's stake in the Alibaba Group, which are slated for share buybacks. This kind of cash being used in an investor-positive, prudent manner, assures future upside for the company. I can easily see this stock above $25 within the next 12 months.
Energizer Holdings (NYSE: ENR)
One of the most interesting and educational hedge fund conferences of the year is the annual Value Investing Congress. At this conference, hedge fund managers talk about their holdings and opinions. Interested investors can attend the conference to learn firsthand what top hedge fund managers are thinking.
At the conference, manager Alexander Roepers of Atlantic Investment Management, recommended battery and personal care product maker Energizer Holdings as a great buy. His firm owns 2.5 million shares of the company and just ramped up its holdings by more than 300,000 shares in the third quarter. He cited a shareholder positive management group, a strategic franchise and predictable cash flows as reasons for his bullishness. Energizer boasts a market capitalization of $4.8 billion, has a strong record of earnings-per-share (EPS) growth and expanding profit margins. However, shares are just breaking even on the year. This spells a nice entry point for investors.
Taking a look at the technical picture, shares are pushing toward resistance at $80. This stock is a clear breakout buy candidate at a daily close above $80. Roeper forecasts Energizer Holdings to reach $100 within 18 months, which sounds reasonable.
Risks to Consider: Hedge funds are not always right with their stock picks. Hedge fund interest simply provides a starting point for investors to do their own due diligence when picking stocks. Regardless of what the hedge fund gurus preach, always use stops and position size properly based on your risk tolerance when investing.
Action to Take --> I like both stocks as long-term investments. Yahoo is a great buy right now, while Energizer Holdings is best entered as a breakout play above $80.