I'm a strong believer in following the big money when it comes to stock investing. Most of the time, when I need an investment idea, I look for the stocks hedge funds are buying. The good thing is that the reversal of this technique can also yield powerful insight into what the big money is doing. In other words, what stocks are hedge funds selling?
Hedge-fund managers would only be selling stocks they believe will underperform in the future. The investment adage of buying weakness and selling strength is apparent when it comes to stocks hedge funds are trading. It's generally not stocks that have been beaten down on the list, but rather companies that have rallied higher.
But sometimes even the big money can make mistakes. In fact, after some quick research on the latest 13F filings, I just found two surprising stocks I think hedge funds are wrongly dumping.
Here they are...
1. Apple (Nasdaq: APPL)
You don't have to be an investment wizard to know that Apple is a company with a stellar management and stunning products. This giant of the tech world hit a peak price on Sept. 19 closing at about $702. Interestingly, hedge funds started dumping the apparently strong stock around the same time it hit its peak value. Large and well-known funds including Maverick Capital, Tiger Global, Greenlight Capital, SAC Capital and Eton Park Capital all slashed their position in Apple during the third quarter.
Although the company still has massive institutional ownership, the selling has been very prophetic. Apple has fallen 23% since its September high.
It's important to note that despite this selling spree, Apple remains one of the largest holdings for Maverick, Tiger Global and Greenlight. But even after selling the shares, Apple's downward slide resulted in negative monthly performance for these funds. Remember, Apple was up more than 70% since the start of 2012 to its September peak.
And not only do I think hedge funds made a mistake selling this stock, but their selling has opened up a great buying opportunity.
Technically, Apple's stock plunged through the 50- and 200-day simple moving average, finally finding support in the $500 range. Apple's fundamental metrics paint a compellingly bullish picture for the shares at the current level.
The company boasts $117 billion in cash and a forward price-to-earnings (P/E) ratio of 9.7, making it a clear fundamental buy. However, I would wait until the 200-day simple moving average at $592 is pierced on the upside, as a daily close, prior to buying into the company. Yes, I will likely miss a few points on the upside, but the technical confirmation of the uptrend should lessen the risk factor.
2. Delphi Automotive (NYSE: DLPH)
Spun off of General Motors (NYSE: GM), Delphi is one of the world's largest suppliers of parts to carmakers. The company has struggled, but reorganization in 2009 and a public offering last year have turned its fortunes. But the hedge funds seemingly believe the slowing economy and European crisis will damage the company.
Hedge funds have been dumping this auto-parts maker, but the stock keeps going higher. In the second quarter, funds dumped nearly 60 million shares, slashing their holdings by more than $3 billion. Just recently, hedge fund wizard John Paulson slashed his Delphi holdings by 7 million shares.
It looks like the hedge funds have been wrong, so far. Massive economic stimulus measures from the central banks worldwide should supercharge the global economy during the next year or so. I think these measures will be a huge positive for Delphi.
The stock is up 47% this year and the company recently reported third-quarter earnings of 84 cents a share, up from 79 cents a share a year ago. Year-over-year revenue, however, was down 6%, as a result of strategic readjustments triggered by the European crisis and currency exchange rates.
Technically, shares have been uptrending since June with a base being built just below the $32 area. A double top at the $34 level creates significant technical resistance. Just like Apple, I prefer to wait for technical confirmation of my bullishness prior to entering the stock. Therefore, I would be a buyer on any daily close above the resistance at $34.
Risks to Consider: Even though there is strong evidence that hedge funds sold these two stocks too early, the verdict is still out on the long-term performance. Always be sure to use stops and position size based on your risk tolerance when investing.
Action To Take --> As I said before, hedge funds aren't always right. I think the massive selling by hedge funds created a great buying opportunity in Apple. The selling appears to have been absorbed in Delphi without much ill effect on the stock's price. Having said that, I prefer to wait for technical confirmation before entering either stock long. My forecast for Apple is $1,000 per share within 18 months and $40 for Delphi should the entries trigger.