FactSet has released a report on the stocks most favored and owned, as of the end of the 3Q, by the 50 largest hedge funds. While some may regard it as a shopping list, in my mind it is more a "don't buy these stocks unless you are forced" list. Crowded trades work until they do not, and when they stop it is a very painful event as way too many sellers find far too few buyers for these over-owned shares. If I were a short-term trader my first act, every morning, would be too run my technical and statistical patterns against this list looking for the ones that may crack because when one of these popular stocks falls apart it could make my whole year.
Kraft Heinz (KHC) , a holding in the Action Alerts PLUS portfolio, makes the very top of the FactSet list. The shares are owned by 14 of the top 50 hedge funds, and they own a lot of it. I can almost make a case for this stock as, thanks to the cost takeouts by 3G Capital and Berkshire Hathaway (BRK.A) , the company has some of the highest margins in the food business. At the end of the day, however, it's the food business. When I look at estimations for growth in food over the next decade I see that pet foods, chocolate candy and diet-meal replacement drinks are expected to grow revenues by 2% a year, but everything else will fail to clear even that low bar. A little deeper digging shows that 1,100 different institutions own this stock, which means if it ever rolls over the damage will be pretty dramatic. This stock is moving to the top of my list to watch for bargain pricing in a market decline because it could result in a fantastic long-term entry price.
Charter Communications (CHTR) is the second-most widely-held stock by the big funds, with 24 of the 50 largest hedge funds owning the shares. I suspect a lot of them backed into ownership during the acquisition of Time Warner Cable (TWC) and Bright House Networks and have just held on as the stock climbed this year. They have a lot of work ahead of them to finish combining the companies, and that could drag on hoped-for earnings and lead to some profit taking. Analysts think Charter may do another deal or use free cash flow to buy back a huge percentage of the outstanding shares. But given the recent runup and lofty valuations, I don't see a lot of room for error with this stock. Its shares are owned by 670 institutions, so the exit could get crowded if results disappoint.
Amazon (AMZN) is third on the list of heavily-owned stocks, but I think it has been there for most of my lifetime. One of my biggest investing mistakes was selling my Amazon convertible bonds years ago after they had tripled for me in the aftermath of the internet bubble bursting. Today the stock is ridiculously expensive, and I could never justify buying it now, but shorting Amazon is like picking a fight with an 800-pound gorilla. Having said that, 21 of the 50 largest funds own the stock, and there are over 1,600 institutional owners. If the market ever falls out of love with Jeff Bezos it will be a messy divorce.
The fourth stock on the list is the most confusing to me. Proctor & Gamble (PG) is not only owned by 11 of the largest funds, it was the most-purchased stock in the quarter. I understand that this is a fantastic company; I just walked around my house and counted how many of their products we had in the pantries and closets and stopped when I got to 10. However, the stock is trading north of 20x earnings, and that is simply too high for a company that can't grow for long much faster than the overall economy. Over the last five years, Proctor & Gamble has posted negative sales growth. An incredible 1,900-plus institutions own this stock, so if the selling ever starts, we may see reasonable valuations for this stock again someday.
You can see the whole FactSet report here. More than seven years into a bull market with the Fed about to begin raising rates and a new administration with all those uncertainties coming into power I don't think this is the time you want to be in crowded trades.