Being an optimist has been a moneymaking bet for long-term investors. For instance, even though the widely followed S&P 500 tumbled 34% in less than five weeks during the first quarter of 2020, it quickly rallied to new highs not long thereafter.
But not every stock is going to head higher.
During the first quarter, three exceptionally popular stocks were heavily sold by institutional investors and hedge funds. We know this because investment firms with at least $100 million in assets under management are required to file Form 13F with the Securities and Exchange Commission (SEC) once a quarter. A 13F provides a snapshot of what the brightest and most successful money managers have been buying and selling.
Here are three popular stocks money managers couldn't stop selling in Q1.
Perhaps the least surprising of the three is video game and accessories retailer GameStop (GME 0.21%). With its shares catapulting into the stratosphere in January, the smart money seized the opportunity to cash in their chips. By the end of March, aggregate ownership by 13F filers had declined by a jaw-dropping 65% from the fourth quarter. It was even worse among hedge funds, which reduced their collective stakes in GameStop by 93%.
As some of you are probably aware, GameStop's mega-rally was fueled by a short squeeze. Retail investors on Reddit and other community chat platforms began banding together in January to buy shares and out-of-the-money call options in stocks with very high levels of short interest. At the time, no publicly traded company had a higher level of short interest, relative to its float, than GameStop. With the perfect recipe in place (a high short interest and short ratio), shares were able to leap from around $20 to almost $500 in a matter of days.
While it's been an incredible ride, and retail investors shook the proverbial boat like never before, money managers likely chose to sell because there's little fundamental substance behind this enormous move higher.
On the one hand, GameStop did manage to grow its e-commerce sales by 191% in 2020, and a recent share offering raised $551 million in gross proceeds. This cash will help the company completely wipe out its remaining debt and will give it more than sufficient capital to further its ongoing digital transformation.
On the other hand, GameStop's foundation has always been its brick-and-mortar operating model. The company waited far too long to begin transitioning to digital gaming, and it'll likely face years of stagnant growth prospects due to its large brick-and-mortar presence. For the time being, GameStop will continue to shutter underperforming stores in an effort to cut costs and push back into the profit column.
Popular biotech stock Sarepta Therapeutics (SRPT -6.98%) also found itself on the chopping block during the first quarter. Among 13F filers, the aggregate number of shares owned declined by over 7% from the sequential quarter. Further, the total number of funds holding Sarepta was slashed by close to 21% in Q1.
The money manager exodus in Sarepta is almost certainly tied to the company's January data release concerning experimental transfer gene therapy drug SRP-9001. SRP-9001 is a drug designed to treat Duchenne muscular dystrophy (DMD) -- a disease diagnosed in children that's characterized by the destruction of muscle tissue over time and premature death.
While Sarepta has been successful in getting the U.S. Food and Drug Administration to approve three of its DMD drugs for specific gene mutations, SRP-9001 would be applicable to a larger percentage of DMD patients. That's because it delivers an adeno-associated virus to muscle tissue that encourages the production of micro-dystrophin. Thus, it's Sarepta's swing-for-the-fences drug.
In Part 1 of Study 102, reported in January, improvements in the North Star Ambulatory Assessment total score were observed, but they weren't statistically significant. The company blamed fitness level differences in trial participants as the reason the results failed to hit statistical significance.
But in Study 103, released last week, mean micro-dystrophin levels observed via muscle biopsies in the first 11 patients of the open-label trial were 55.4% of normal. Without getting overly technical, SRP-9001 appeared to induce a robust dystrophin-producing response.
At this point, Sarepta's long-term growth hinges on SRP-9001. Money managers have never been fans of 50-50 bets, and that's unfortunately what Sarepta is shaping up to be.
The third extremely popular stock that had Wall Street mashing the sell button in the first quarter is electric vehicle (EV) manufacturer Tesla Motors (TSLA -0.08%). In total, aggregate share ownership by 13F filers plunged 10% (about 43 million shares) from the sequential fourth quarter, and the number of new positions opened fell 62%.
The single biggest reason money managers ran for the exit was probably Tesla's valuation. Tesla was nearing a $900 billion market cap in January, yet has had to use a number of (legal) accounting tricks to generate a profit. A quick look at Tesla's quarterly income statements shows that it's relied on selling renewable energy credits to other automakers, as well as selling some of its Bitcoin for a profit in the first quarter, as a means to push itself into the black. However, without renewable energy credits and other one-time benefits, Tesla is unprofitable solely from selling EVs and providing other energy solutions via its ancillary operations.
Money managers may also be losing faith in CEO Elon Musk. No one will question that Musk is a visionary. Then again, he's also proved he can be a liability. Musk has frequently over-promised and under-delivered when it comes to launching new products on stated timelines. He's also previously found himself in trouble with the SEC and seems to be spending far too much time tweeting about cryptocurrencies of late.
Another possibility is that money managers are skeptical of Tesla's ability to hold on to its competitive advantages. According to Tesla's Battery Day event last year, it holds clear-cut capacity, power, and range advantages over its peers. But with General Motors, Ford, and other auto stocks investing tens of billions of dollars into EV and autonomous driving research, it seems unlikely that Tesla will drive away from its competition.