This content is from: Portfolio

Following the Smart Money Was Stupid in the Second Quarter

It wasn't a good idea to simply follow the investments of hedge fund managers based on their 13F filings from the previous quarter.

Following the smart money was not necessarily a good strategy during the second quarter.

The most overweighted stocks by hedge funds at the end of the first quarter — identified by the quantitative research department at Credit Suisse Securities — lost 2.80 percent. This was better than the S&P 500, however, which lost 3.29 percent.

But if you bought these stocks on May 16 — the first day after all of the hedge funds had completed their quarterly 13F filings detailing their stock holdings for the end of the prior quarter — you would have made just 2.69 percent. This slightly lagged the S&P 500, which rose 2.82 percent for the same time period.

We only calculated the returns for 13 of the 15 stocks, however, since in May Kinder Morgan completed its acquisition of El Paso and Google completed its acquisition of Motorola Mobility Holdings.

Drilling through the data, it turns out just six of the 13 remaining stocks outperformed the S&P 500 since the 13Fs were disclosed, while seven stocks outperformed the market if they were held the entire quarter.

A quick look at the results clearly shows the averages are skewed by the woeful performance of J.C. Penney Co., whose stock dropped more than 34 percent in the quarter and nearly 13 percent since the 13F filings were made.

In fact, J.C. Penney Co. is one of nine of the total 13 stocks tracked that fared better after mid-May when the average investor was made aware of these holdings compared to the entire quarter.

For example, Sears Holdings, the largest position of ESL’s Ed Lampert, lost about 8.4 percent for the entire quarter and made more than 17 percent since mid-May. and General Dynamics also lost money for the quarter but were in the black since the 13Fs were fully filed.

In the first quarter when also ranked among the 15 stocks most overweighted by hedge funds, shares of the e-commerce Internet company surged more than 53 percent in the quarter and 25 percent from mid-February — when the year-end 13Fs were fully filed — through the end of March.

Here are the 15 most overweighted stocks by hedge funds on March 30 and how they subsequently fared.

How They Performed
4/2/12 - 6/29/12
5/16/12 - 6/29/12
Express ScriptsESRX$54.18$52.75$55.833.05%5.84%
El Paso EP
Motorola Mobility
Sears HoldingsSHLD66.2550.8759.70(8.38)17.36
Motorola SolutionsMSI50.8348.7648.11(5.35)(1.33)
General DynamicsGD73.3865.2065.96(10.11)1.17
Crown Castle Intl.CCI53.3454.2758.669.978.03
JC PenneyJCP35.4326.7523.31(34.21)(12.86)
Average return(2.80)2.69
S&P 5001408.471324.801362.16(3.29)2.82

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