While it’s always important to conduct your own due diligence in the equities arena, there’s great value in understanding which hedge fund stocks to avoid. Put another way, these are the stocks that hedge funds are unloading, which should inspire additional research. Fundamentally, if the enterprises with the greatest access to information don’t believe in the impacted securities, you might not want to either.
As well, another reason to carefully monitor stocks that hedge funds are bearish on centers on the folks these investment giants hire. Obviously, they don’t just pick up people randomly off the streets. Rather, we’re talking about some of the brightest, most educated minds on Wall Street. If they don’t like something, you should at least find out why. Again, it’s always important to do your own research first before making a major decision. With that said, the big dogs command a big influence. Therefore, watch out for these potential hedge fund sell-offs.
A giant in the broader financial services arena, Visa (NYSE:V) typically courts positive investor sentiment. However, according to data compiled by HedgeFollow, institutional investors sold $11.36 billion worth of V stock. Individually, Janus Henderson (NYSE:JHG) represented the top seller at $1.17 billion.
It’s not entirely clear why the big dogs apparently fell out of favor with Visa. Since the beginning of this year, V stock gained nearly 13% of its equity value. Overall, in the past 365 days, it’s up almost 10%. However, Visa’s viability depends on a robust consumer economy. Therefore, V may be one of the hedge fund stocks to avoid due to recession risks.
On the other hand, no financial evidence suggests imminent failure. For example, Visa carries a solid balance sheet, undergirded by an Altman Z-Score of 7.52 (which indicates low bankruptcy risk). Also, the company features strong profitability, particularly a net margin of 50.28%. Finally, Wall Street analysts peg V as a consensus strong buy. Their average price target stands at $264.44, implying 13% upside potential.
Another curious name among hedge fund stocks to avoid is Visa rival Mastercard (NYSE:MA). Regulatory filings posted since the beginning of the first quarter of this year note that institutional investors sold $10.42 billion worth of MA stock. Again, the main “culprit” is Janus Henderson at $3.33 billion.
As with its rival, Mastercard printed a positive performance in the charts (though not to the same degree). Since the beginning of the year, MA popped up over 7%. In the past 365 days, shares moved up over 4%. Fundamentally, the big dogs may be limiting exposure to companies tied to the consumer economy. While MA may turn out to be one of the hedge fund sell-offs, no real evidence of that presently exists. For instance, Mastercard’s Altman Z-Score pings at 10.16, reflecting an extremely low risk of bankruptcy. Operationally, it features decent revenue growth and excellent profit margins.
Moreover, analysts peg MA as a consensus strong buy. Their average price target stands at $423.75, implying nearly 14% upside potential.
A cloud-based software company, Salesforce (NYSE:CRM) currently rides a comeback effort from the technology fallout of last year. Unfortunately, CRM technically ranks among the hedge fund stocks to avoid. Per HedgeFollow, institutional investors sold $10.39 billion worth of CRM stock. Jennison Associates LLC led the jettisoning, selling $842.7 million.
Again, it’s tough to discern exactly why CRM stands among the stocks that hedge funds are bearish on. Since the Jan. opener, CRM gained over 44% of equity value. In the trailing year, Salesforce now turns in a positive performance, up 4%. However, it’s possible that the institutional players believe the best is behind the company. Financially, Salesforce benefits from strong operations, particularly its three-year revenue growth rate of 16.1%. However, it does seem overvalued. Currently, the market prices CRM at a trailing multiple of 926.9.
That said, analysts peg CRM as a consensus moderate buy. Their average price target stands at $223.21, implying nearly 15% upside potential.
JPMorgan Chase (JPM)
A major financial force, JPMorgan Chase (NYSE:JPM) typically wouldn’t classify as one of the hedge fund stocks to avoid. However, regulatory filings reveal that institutional investors sold a total of $9.91 billion worth of JPM stock. Here, Sanders Capital represented the biggest pessimist, dumping $1.09 billion.
Like the other stocks that hedge funds are unloading, JPM actually represents a decent performer. Since the Jan. opener, shares moved up almost 3%. In the past 365 days, they’ve gained 8% of equity value. However, the banking sector fallout didn’t do any favors regarding segment confidence. Therefore, it’s possible that the big dogs wanted to trim their exposure. Still, investors should note that JPM doesn’t necessarily strike as a need-to-dump enterprise. However, the market prices JPM at a forward multiple of 11.64, which rates as overvalued.
Nevertheless, analysts peg JPM as a consensus strong buy. Their average price target stands at $154.21, implying over 11% upside potential.
A health insurance provider, Cigna (NYSE:CI) may be one of the more sensible ideas for hedge fund stocks to avoid. Basically, CI hasn’t performed that well this year, attracting the bears. Per regulatory filings, institutional investors sold $9.09 billion worth of CI stock. Again, Sanders Capital took the spot as a lead pessimist, dumping $2.34 billion.
From the charts, it’s not surprising. Since the Jan. opener, CI gave up over 19% of its equity value. And in the trailing one-year period, CI barely pokes its head above water. Therefore, it seems like a future name among hedge fund sell-offs, particularly if mass layoffs continue. With accelerating pink-slip distributions, Cigna’s addressable market may decline. Troubles might be appearing on the financials. The company only features modest stability in the balance sheet. Further, its revenue growth and net margin print unremarkable stats.
However, analysts peg CI as a consensus moderate buy. Their average price target stands at $350.17, implying over 35% upside potential.
A globally diversified conglomerate, Danaher (NYSE:DHR) generally performs well. In the trailing five-year period, DHR gained over 148% of equity value. However, that didn’t impress institutional investors, making it one of the hedge fund stocks to avoid. Since the beginning of Q1 2023, the big dogs sold $8.7 billion worth of DHR stock. Janus Henderson was the top seller at $1.55 billion.
While Danaher tends to be a steady performer, this year, it hasn’t been that impressive. Since the January opener, DHR slipped 4%. Over the past 365 days, the security lost nearly 9%. However, the volatility for DHR might be a case of trimming as opposed to an ominous indicator of hedge fund sell-offs. Financially, Danaher offers plenty of substance.
Operationally, the company’s three-year revenue growth rate pings at 20% while its free cash flow growth rate hits 29.8%. Both stats rank in the underlying industry’s upper half. Also, the business is profitable, with a net margin of nearly 23%. Perhaps the most damning reason why you shouldn’t follow the hedge funds so aggressively on this trade centers on analyst ratings. Overall, the consensus stands as a strong buy with a price target implying over 20% upside potential.
O’Reilly Automotive (ORLY)
A somewhat curious idea among hedge fund stocks to avoid is O’Reilly Automotive (NASDAQ:ORLY). Essentially, O’Reilly helps keep jalopies on the road longer, which should be beneficial during a possible economic downturn. Nevertheless, institutional investors sold $7.15 billion worth of ORLY stock. Here, the lead pessimist is Baader Bank, dumping $3.92 billion.
On paper, ORLY stock doesn’t seem to deserve the title of stocks that hedge funds are bearish on. Since the January opener, ORLY gained more than 6% of its equity value. In the trailing one-year period, it’s up nearly 24%. However, it’s quite possible that the top dogs don’t believe the underlying recessionary argument will hold up indefinitely.
While hard-hit consumers may attempt to save money by repairing their rides rather than replacing them, the job losses associated with a recession may hurt both segments of the auto industry: car sales and parts. Interestingly, analysts peg ORLY as a consensus moderate buy. However, their average price target lands at $883.55, implying 1% downside risk.
On the date of publication, Josh Enomoto did not have (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.