Top hedge fund managers are always buying and selling stocks, and often their decisions have more to do with portfolio allocation than they do with a company's long-term potential. Regardless, it can still be helpful to keep an eye on stocks that top managers are selling because their actions can reveal sector-, industry-, or company-specific problems that can derail your returns. With this in mind, we asked top Motley Fool contributors to review stocks that are being sold by some of the world's biggest hedge fund tycoons, and then to report back to us what stocks stuck out to them. Among the stocks they flagged are Humana (HUM +2.84%), Tesla Motors (TSLA +2.40%), and Netflix (NFLX +0.34%). Should you sell these stocks too?
Image source: GeorgeSoros.com.
Heading out of health insurance
Todd Campbell (Humana): Given that shares in the well-known health insurer Humana have rallied 16% since Donald Trump's win of the White House, legendary hedge fund guru George Soros might want a do-over.
Soros unloaded his stake in Humana after the company reported that losses would force it to reduce its exposure to business related to the Affordable Care Act, known as Obamacare, next year, and the Department of Justice filed an antitrust lawsuit to block Aetna's planned takeover of it.
Those once-worrisome developments, however, are a lot less concerning now that Trump has won the Oval Office. The business-minded president-elect plans to repeal and replace Obamacare, and it wouldn't shock me if his replacement proves to be more profit-friendly to insurers. Furthermore, Trump's victory may provide cover for Republican judge John Bates to approve Humana's merger with Aetna in the antitrust case. That case is expected to get underway on Dec. 5.
Since aging baby boomers give Humana's Medicare business long-haul tailwinds, and a friendlier regulatory environment could make this insurer even more profitable in the future, following in Soros' footsteps out of Humana may not be the right move.
Potential speed bumps for Tesla
Daniel Miller (Tesla Motors): Tracking what billionaire hedge fund managers buy and sell can help individual investors find trends and ideas, or simply mimic the pros without paying fees. While we might not necessarily agree with the moves, they are at least worth noting. Case in point, Thornburg Investment Management, which has an asset base around $55 billion, recently exited its position in Tesla Motors Inc.
The driving force behind the decision was the thought that Tesla's management is biting off more than it can chew with the potential SolarCity acquisition, and that, while the move is exciting, the probability of failure has also increased.
Investors also face even more uncertainty owning Tesla after witnessing Donald Trump's surprise victory earlier this month. This now brings the possibility that the federal government's $7,500 tax incentive for qualifying plug-in vehicles could be diminished or ended entirely after Trump enters the White House.
Many analysts are also concerned that, under Trump control, the looming Corporate Average Fuel Economy standards, which require a fleet-average miles per gallon of 54.5 by 2025, will be relaxed. If the fuel efficiency standards were relaxed, it could easily slow the research and development from major automakers, and thus slow the mainstream adoption of electric vehicles.
This all culminates to make a very speculative stock, which is a reality most investors of Tesla are very aware of. Shares currently trade with very high expectations, and any additional uncertainty or slowdown in EV adoption and growth could lead to a severe decline in stock price. While Tesla has avoided such a price decline, and I'm a fan of the automaker, at least one billionaire hedge fund manager sees too much risk going forward.
Netflix made the "smart money" look dumb
Jamal Carnette, CFA (Netflix): One of the biggest growth stocks sold off by the proverbial "smart money" was Netflix. According to hedge fund tracking tool Whale Wisdom, Netflix's aggregate shares held by institutional managers with over $100 million in assets fell approximately 4.7% during the second calendar quarter, with more funds selling the entertainment company than buying.
Shares sold off approximately 11% during the company's second-quarter conference call in part due to a weaker-than-expected outlook during management commentary and the fact the company added only 1.7 million subscribers during the quarter, less than the 2.5 million expected additions. The disappointing figures were attributed, in part, to higher monthly subscription costs.
However, if you had purchased Netflix during that period, you'd be outperforming the "smart money." After falling to approximately $85 per share, the stock has now increased to $117 per share, up approximately 40% from post-earnings lows. Netflix rebounded in its third-quarter earnings by posting a massive subscriber gain of 3.57 million, more than the 2.3 million forecast.
Furthermore, Netflix looks to continue its strong growth. During the third quarter, management expects to add 5.2 million subscribers, topping the 4.6 million consensus estimate. It appears remaining subscribers and prospective customers are not worried about higher costs. In the long run, Netflix will rise and fall on the strength of its programming. As Netflix plans to add approximately 67% more premium original programming next year, fans of the series Stranger Things, Narcos, House of Cards, and Unbreakable Kimmy Schmidt will continue to shell out money for the service.
