5 most popular stocks among hedge funds

Date: Thursday, November 28, 2013
Author: Meena Krishnamsetty, MarketWatch

After the end of each quarter, hedge funds and other major investors disclose their long equity positions in stocks that are publicly traded in U.S. exchanges. Our research has shown that investors can significantly outperform the market by tracking the stocks traded by hedge funds.

Historically, the 15 most popular small-cap stocks among hedge funds outperformed the market by an average of 18 percentage points per year (check out the details on our strategy here). Our model portfolio, which sticks to this approach, outperformed the S&P 500 by 29 percentage points in its first year, having returned 47.6%.

Hedge funds are also skilled at picking large-cap stocks. The most popular large-cap stocks historically outperformed the market by a small margin. Apple Inc. was the most popular stock among hedge funds during 2011 and 2012. This year we have seen Apple AAPL +0.19% displaced from its throne (as the favorite amongst hedge funds in the first quarter) by Google Inc. GOOG +0.11% during the second quarter. Google's dominance didn't last long, and the leader was dislodged once again during the third quarter: the hedge funds' new pet is General Motors Company GM +0.08% .

Let's take a look at the five most popular stocks among hedge funds at the end of the third quarter:

1. General Motors

Any company on which Warren Buffett places big bets deserves our attention. Buffett's Berkshire Hathaway BRK.A -0.05%   BRK.B +0.04%  has been buying this stock since it was trading in the low $20s. Currently Berkshire holds more than $1.4 billion in shares (this represents about 1.56% of its portfolio). Another "hedgie" bull that we should mention is David Einhorn's Greenlight Capital, which owns more than $600 million in shares.

General Motors has also become the most popular stock amongst the hedge funds that we track. At the end of the third quarter, 140 funds held stakes in the company, compared to 122 at the end of the second quarter.

2. Google

Google has been the third quarter’s big loser. At least 20 hedge funds sold out their positions at the Internet giant. At the end of the third quarter, 139 funds were bullish about Google; this means a 12.5% decrease in relation to the previous quarter. Even its largest bull by the end of the second quarter, Stephen Mandel's Lone Pine Capital, cut its stake by 57% during the third quarter.

However, several investment gurus are in fact still betting on this company's future performance. Currently, the most bullish amongst hedgies is Lansdowne Partners.

3. Apple

During the third quarter Apple regained some of the ground lost during the second quarter. By the end of the third quarter, 132 funds disclosed long positions in the firm, compared with 123 by the end of the second quarter. Billionaire David Einhorn holds now roughly $1 billion in Apple´s stock.

4. AIG

American International Group AIG +0.53% lost some popularity during the quarter. Eight hedge funds abandoned their positions at the insurer, leaving 131 of them still betting on the firm´s prospects. "Stock Manager of the Decade" Bruce Berkowitz holds, by far, the largest stake in the company (more than $4 billion in stock, which represents more than half its portfolio).

5. Citigroup

Citigroup Inc C +0.08% is the third major loser. After six hedge funds sold out their positions, bulls now amount to 115. We would like to highlight, however, Ken Fisher's bet on this financial institution: over the third quarter, it roughly doubled its stake and now holds almost 11 million shares, worth more than $500 million.

You can check out the rest of the 10 most popular stocks here.