Six new stocks were made their appearance on the list of 15 stocks most overweighted by hedge funds at the end of the third quarter.
They were Motorola Mobility Holdings, News Corp., Goodrich Corp., Beam, Medco Health Solutions and Express Scripts. In fact, Motorola Mobility and News Corp. topped the list as the most overweighted stocks for this investor group at the end of the three-month period.
They bumped out Citigroup, Viacom, Cephalon, Fortune Brands, General Dynamics Corp. and Netflix, according to an analysis by the quantitative research team at Credit Suisse Securities.
An active weight is taken when the weight of a stock within the aggregate hedge fund portfolio differs from the weighting of the stock in the Standard & Poor’s 500 Index, Credit Suisse explains. Overweighted stocks have a greater weight in the hedge fund portfolio than in the S&P 500 benchmark.
Keep in mind that Sears Holdings Corp., AutoZone and AutoNation are longtime large holdings of Edward Lampert’s ESL Investments. However, as we have reported, Lampert has been trimming his stakes in AutoZone and AutoNation this year.
On the other hand, Intel Corp. was the only new addition to the list of companies most underweighted by hedge funds in the third quarter. It replaced Philip Morris International.
Remember, holders of at least $100 million in U.S. equity–oriented investments are required to tell regulators their holdings as of the last day of each quarter in a 13F filing with the Securities and Exchange Commission. It is a snapshot of one day in time. They also have up to 45 days from the end of the quarter to file these reports.
Most hedge funds like to wait until the last minute before pressing “send.” The September 30 holdings were mostly reported around mid-November.
Given this time lapse, can an investor make money buying the stocks that hedge funds most recently reported owning? So far the results are mixed.
When we analyzed the filings, for example, we found that if on August 16 you bought the 15 stocks most overweighted by hedge funds as disclosed in the 13F filings on June 30, you would have lost 8.53 percent by the end of September. This was worse than the S&P 500, which dropped about 5.14 percent during the same period.
And even if you were privy to these holdings when the second quarter actually ended, you still would have lost 17.33 percent from July 1 through September 30. This compares with a 14.3 percent decline for the S&P 500.
The performance of the portfolio of 15 stocks, however, was skewed fairly heavily by the collapse in shares of web-based movie rental company Netflix, which gave up more than half its value after it made a very unpopular announcement in early July that it would change its pricing policy.
On the other hand, you would have fared pretty well if you had bought the stocks most overweighted by hedge funds at the end of the first quarter and held them until the end of June.
Altogether the average return for the most widely held hedge fund stocks from May 16 through June 30 was 1.8 percent. This compared with a loss of 0.7 percent for the S&P 500.
If you had bought the most overweighted stocks at the end of the first quarter and held them for the next three months, the average return for the basket of stocks worked out to a 0.9 percent gain, compared with a 0.4 percent loss for the S&P 500.
