Chrysler Recalls Over 566,000 Vehicles for Safety Issues

Chrysler via AP DETROIT -- Fiat Chrysler (FCAU) is recalling more than 566,000 trucks and SUVs in two recalls for malfunctioning fuel heaters that can cause fires and a software glitch can disable the electronic stability control. The recalls bring the newly merged company's total for the year to 6.4 million vehicles worldwide and 5.1 million in the U.S. as it continues to struggle with reliability problems. It wasn't immediately clear whether those totals were annual records. On Tuesday, its longtime quality chief abruptly left after Fiat Chrysler performed poorly in Consumer Reports magazine's annual reliability rankings. The largest of two recalls announced Wednesday covers almost 382,000 Ram 2500 and 3500 pickups and Ram 4500 and 5500 chassis cabs from 2010 through 2014. In trucks with 6.7-Liter Cummins diesel engines, corrosion on a fuel heater terminal could cause overheating, fuel leaks and fires. Chrysler isn't aware of any fires or injuries. Owners could be warned by an odor of diesel fuel. Customers will be notified by letters starting in December. Dealers will install upgraded terminals and fuel heater housings could be replaced. The second recall covers more than 184,000 Jeep Grand Cherokee and Dodge Durango SUVs from 2014. A debris cover over a circuit board in the steering column control module can disrupt communications and disable the stability control. The problem was discovered when dealers started getting reports from customers that electronic stability control warning lights were coming on. Fiat Chrysler says it knows of no crashes or injuries caused by the problem. Technicians will upgrade software to fix the SUVs, and customers will be notified in December. Fiat Chrysler has issued 33 global recalls and 27 in the U.S. so far this year. Doug Betts, its longtime quality chief, left the company to pursue other options after Consumer Reports' survey-based rankings this year showed four Fiat Chrysler brands at the bottom of its list. Dodge, Ram, Jeep and Fiat performed worst of 28 brands ranked by the magazine. Company spokesman Eric Mayne said Fiat Chrysler's recalls average fewer than 200,000 vehicles each, below the industry average of 301,000. That means the company is responding quickly to problems, he said, adding that eight of its 27 U.S. recalls were announced before the company received any consumer complaints. Chrysler isn't alone with a high number of recalls so far this year. Stericycle, a company that tracks recalls, says companies have called back more than 52 million vehicles so far this year, breaking a record set in 2004. MSRP: $26,495 Resale value retained after five years: 50.5 percent Even under Fiat (FIATY) ownership, some elements of Dodge's mouth-breathing, knuckle-dragging, He-Man-Woman-Haters-Club approach to auto sales managed to survive. The built-by-car-guys-for-car-guys Challenger and its rebooted muscle car aesthetic still lingers to lure meatheads who value racing stripes and rims over, oh, just about any other element of their vehicle. Ordinarily, that alone wouldn't make one of these vehicles worth a second look five years from now --  even among the most superficial gearheads. But Fiat helped the Challenger smarten up a little bit by coupling a 305-horsepower V6 engine or 375-horsepower 5.7-liter V8 Hemi with loads of interior space, real-time touchscreen navigation, traffic updates, Bluetooth connectivity,  Sirius (SIRI) XM satellite radio, keyless entry/starter and a whole lot of Harman Kardon audio upgrades.

Goldman Sachs Takes Steps to Comply with New Regulations

In this article, let's take a look at The Goldman Sachs Group, Inc. (GS), a $81.03 billion market cap company, which is one of the world's leading investment banking and securities companies.

Basel III

We continue to believe Goldman Sachs will remain profitable and will earn above industry average returns on capital. The bank plans to lower its financial leverage to comply with Basel III regulatory capital requirements. As a matter of fact, reallocating capital from lower to higher-return on regulatory capital businesses will be the management´s next actions. Since the 2008 crisis, the bank has cut balance sheet risk by increasing capital so as to absorb losses in case the bank needs it.

Like any other bank, a crisis in the financial system could hurt solvency or liquidity ratios, so Goldman must remain adaptable to adverse scenarios. Cost-cutting policies should improve profitability as well as its business diversification or reduction of some areas such as principal investments and mortgage securitization. This decision may also reduce earnings volatility and improve the balance sheet.

Investment Banking

In the investment banking segment, Goldman differentiates from its peers because of its distribution platform as well as the extensive web of relationships. Further, Goldman has built a good reputation to hire top talent. Moreover, the firm has a solid history of strong growth as well as returns due to advantages, such as technology and risk management.

Dividend Policy

Since 1999, Goldman has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Although the current dividend yield is not high at 1.2%, it can improve in the future allowing higher shareholder´s returns.

Revenues, Margins and Profitability

Looking at profitability, revenue grew by 16.36%, leading earnings per share to increase in the most recent quarter compared to the same quarter a year ago ($4.57 vs $2.88). During the past fiscal year, the company increased its bottom line by earning $15.47 versus $14.15 in the previous year. This year, Wall Street expects an improvement in earnings ($17.51 versus $15.47).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker	Company	ROE (%)
GS	Goldman Sachs	13.13
JPM	JPMorgan Chase & Co.	10.09
RJF	Raymond James Financial Inc.	12.21
	Industry Median	7.29

The company has a current ROE of 13.13% which is higher than the one exhibited by its peers JPMorgan Chase (JPM) and Raymond James (RJF). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 11.8x, trading at a discount compared to an average of 22.3x for the industry. To use another metric, its price-to-book ratio of 1.12x indicates a discount versus the industry average of 1.42x while the price-to-sales ratio of 2.63x is below the industry average of 3.21x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $10,211, which represents a 0.5% compound annual growth rate (CAGR).

Final Comment

As outlined in the article, Goldman has a history of successful margins, as well as the ability to change or adapt its business model. In an era where competitors in the U.S. or in Europe were forced to make restructuring operations, Goldman can take advantage of this and gain market share. Moreover, management and other top-talented people are capable of outperform the competition.

Further, the stock's relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus Joel Greenblatt (Trades, Portfolio) and HOTCHKIS & WILEY bought the stock, while Mario Gabelli (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio), Bill Nygren (Trades, Portfolio), John Rogers (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Dodge & Cox, John Buckingham (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Scott Black (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

Also check out: Bill Nygren Undervalued Stocks

5 Stocks Set to Soar on Bullish Earnings

DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

Must Read: Warren Buffett's Top 10 Dividend Stocks




This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.



That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.



Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if Wall Street doesn't like the numbers or guidance.



If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

Must Read: 5 Stocks Poised for Breakouts

Rayonier Advanced Materials

My first earnings short-squeeze trade idea is specialty cellulose fibers producer Rayonier Advanced Materials (RYAM), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Rayonier Advanced Materials to report revenue of $259.82 million on earnings of 66 cents per share.

The current short interest as a percentage of the float for Rayonier Advanced Materials is extremely high at 34.9%. That means that out of the 39.80 million shares in the tradable float, 13.91 million shares are sold short by the bears. This is a monster short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily set off a large short-squeeze that sends the bears scrambling to cover some of their positions.

From a technical perspective, RYAM is currently trending below its 50-day moving average, which is bearish. This stock recently formed a double bottom chart pattern at $28.65 to $28.52 a share. Shares of RYAM have started to bounce modestly off those support levels and it's beginning to move within range of triggering a near-term breakout trade post-earnings.

If you're bullish on RYAM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $30 to $31 a share and then above its 50-day moving average of $31.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 1 million shares. If that breakout triggers post-earnings, then RYAM will set up to re-test or possibly takeout its next major overhead resistance levels at $33.44 to $33.65 a share, or $34.51 a share. Any high-volume move above $34.51 will then give RYAM a chance to re-fill some of its previous gap-down-day zone from July that started near $38 a share.

I would simply avoid RYAM or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its all-time low of $28.52 a share (or below Tuesday's intraday low if lower) with high volume. If we get that move, then RYAM will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $25 to $20 a share.

Must Read: 5 Stocks Under $10 Set to Soar

LifeLock

Another potential earnings short-squeeze play is proactive identity theft protection services provider LifeLock (LOCK), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect LifeLock to report revenue $120.72 million on earnings of 15 cents per share.

The current short interest as a percentage of the float for LifeLock is very high at 19.8%. That means that out of the 56.37 million shares in the tradable float, 11.15 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 4.5%, or by 479,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of LOCK could easily rip sharply higher post-earnings as the shorts move to cover some of their positions.

From a technical perspective, LOCK is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last five months, with shares moving higher from its low of $10.48 to its recent high of $16.09 a share. During that uptrend, shares of LOCK have been making mostly higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of LOCK within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on LOCK, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $16.09 to $17.03 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 939,997 shares. If that breakout kicks off post-earnings, then LOCK will set up to re-test or possibly take out its next major overhead resistance levels at $21.25 to its all-time high of $22.85 a share.

I would simply avoid LOCK or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $14.90 a share with high volume. If we get that move, then LOCK will set up to re-test or possibly take out its next major support levels at $14.04 to $13.64 a share. Any high-volume move below those levels will then give LOCK a chance to tag $13 to $12 a share.

Must Read: 5 Rocket Stocks to Buy for November Gains

Knowles

Another potential earnings short-squeeze candidate is communication equipment player Knowles (KN), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Knowles to report revenue of $307.22 million on earnings of 41 cents per share.

The current short interest as a percentage of the float for Knowles is very high at 19.1%. That means that out of the 84.76 million shares in the tradable float, 16.23 million shares are sold short by the bears. If the bulls get the earnings news they're looking for, then shares of KN could easily rip sharply higher post-earnings as the bears rush to cover some of their trades.

From a technical perspective, KN is currently trending below its 50-day moving average, which is bearish. This stock has been downtrending badly over the last two months, with shares moving lower from its high of $33.82 to its recent new all-time low of $17.23 a share. During that move, shares of KN have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of KN have started to bounce a bit off that all-time low of $17.23 a share and it's beginning to move within range of triggering a near-term breakout trade.

If you're bullish on KN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $19.45 to $21 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 1.72 million shares. If that breakout develops post-earnings, then KN will set up to re-test or possibly take out its next major overhead resistance levels at $24 to $25.46 a share, or even its 50-day moving average of $27.31 a share.

I would avoid KN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $18 to its all-time low of $17.23 a share with high volume. If we get that move, then KN will set up to enter new 52-week-low territory, which is bearish technical price action. Some possible downside targets off that move are $15 to $12 a share.

Must Read: 5 Stocks Insiders Love Right Now

Amedisys

Another earnings short-squeeze prospect is home health and hospice care services provider Amedisys (AMED), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Amedisys to report revenue of $299.26 million on earnings of 15 cents per share.

The current short interest as a percentage of the float for Amedisys is pretty high at 12.7%. That means that out of 28.17 million shares in the tradable float, 3.59 million shares are sold short by the bears. This is a large short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of AMED could easily soar sharply higher post-earnings as the bears move fast to cover some of their positions.

From a technical perspective, AMED is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been consolidating and trending sideways over the last three months, with shares moving between $19.03 on the downside and $22.58 on the upside. Any high-volume move above the upper end of its recent sideways trading chart pattern post-earnings could easily trigger a big breakout trade for shares of AMED.

If you're bullish on AMED, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some key overhead resistance levels at $22.20 to its 52-week high at $22.58 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 370,226 shares. If that breakout materializes post-earnings, then AMED will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $30 to $35 a share.

I would simply avoid AMED or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below its 50-day moving average of $20.70 a share and also below more key near-term support levels at $19.39 to $19.03 a share with high volume. If we get that move, then AMED will set up to re-test or possibly take out its next major support levels at its 200-day moving average of $16.78 a share to around $15 a share.

Must Read: 10 Stocks George Soros Is Buying

Cliffs Natural Resources

My final earnings short-squeeze play is international mining and natural resources player Cliffs Natural Resources (CLF), which is set to release numbers on Monday after the market close. Wall Street analysts, on average, expect Cliffs Natural Resources to report revenue of $1.28 billion on a loss of 3 cents per share.

Just recently, Credit Suisse analyst Nathan Littlewood said in a report that Credit Suisse is very bullish in the short term for the coming earnings report for Cliffs Natural Resources, but the firm is more cautious in the longer term. Littlewood has an underperform rating on the stock with a $10 per share price target. Littlewood also said that the bulls could cause a short-squeeze in CLF when they report earnings, since he expects the firm to surprise Wall Street.

The current short interest as a percentage of the float for Cliffs Natural Resources is extremely high at 53.2%. That means that out of the 128.56 million shares in the tradable float, 68.46 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 14.5%, or by 8.66 million shares. If the bears get caught pressing their bets into a strong quarter, then shares of CLF could easily jump sharply higher post-earnings as the shorts rush to cover some of their trades.

From a technical perspective, CLF is currently trending well below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last three months, with shares plunging lower from its high of $18.25 to its new 52-week low of $7 a share. During that downtrend, shares of CLF have been making mostly lower highs and lower lows, which is bearish technical price action. That said, shares of CLF have now started to rebound sharply off that $7 low and it's now quickly moving within range of triggering a big breakout trade above some key near-term overhead resistance levels.

If you're in the bull camp on CLF, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $9.73 to $9.96 a share with high volume. Look for volume on that move that registers near or above its three-month average action of 9.82 million shares. If that breakout gets underway post-earnings, then CLF will set up to re-test or possibly take out its next major overhead resistance levels at its 50-day moving average of $12.18 to $13 a share, or even $14 a share.

I would avoid CLF or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support at $8.16 a share with high volume. If we get that move, then CLF will set up to re-test or possibly take out its next major support level at its 52-week low of $7 a share. Any high-volume move below that level will send shares of CLF into new 52-week-low territory, which is bearish technical price action.

Must Read: 10 Stocks Carl Icahn Loves in 2014

To see more potential earnings short squeeze plays, check out the Earnings Short-Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

RELATED LINKS:

>>5 Stocks Spiking on Unusual Volume

>>5 Stocks Under $10 Set to Soar

>>How to Trade the Market's Most-Active Stocks

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com.

You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

PepsiCo Gives Some Solid Reasons To Believe In Its Future

The beverage market has changed a lot over the last few years, as people have become health conscious and want more healthy drinks rather than the sugary ones. Thus, the beverage retailers have shifted their focus to making juices and other energy drinks for the customers. Further, this change in customers' preferences has resulted in lower sales of carbonated soft drinks.

However, PepsiCo (PEP) seems to be managing its way out as it registered a blockbuster third quarter. The recently reported numbers are way ahead of the Street's expectations, enabling the share prices to rise. Let us dig in deeper.

The impressive numbers

Sales jumped 2% to $17.2 billion, over last year's quarter. This was ahead of analysts' expectations of $17.1 billion. On an organic basis, revenue surged 3% as compared to the previous year. Ramped-up promotions, through advertisements and discounts, helped the company attract more customers. Also, an increase in product prices in the previous quarter drove the top line higher.

Going by the segments, snacks division is the most attractive segment for the retailer. Sales in the Frito Lay category jumped 3%, which helped in offsetting the weakness in other categories. But sales in the Quaker Food division declined 2%. The beverage segment reported flat sales since the decline in carbonated soft drinks was offset by growth in the non-carbonated drinks.

The beverage retailer also did well on the earnings front. The bottom line jumped 7% to $1.36 per share, much higher than the estimate of $1.29 per share. PepsiCo's cost cutting plan, initiated in 2012, and productivity gains helped earnings grow.

By the geography

Revenue from AMEA (Asia, Middle East & Africa) region grew 11% over last year. Performance in this segment was dr

First Take: Google gobbles up online ad business

SAN FRANCISCO — Google's latest financial results, released late Wednesday, suggest the Internet search giant is doing to other online ad sellers what it's already done to the print publishing industry: wrestling away an ever-larger share of advertising growth and driving ad rates inexorably lower.

The company's quarterly net income and profit margin show that the nascent-but-exploding trend of so-called programmatic display ad buying is helping to pour cash into Google's coffers like a fire hose.

The company generated a staggering $4.1 billion in operating income and $3.45 billion in net profit for the three months ended March 31, as revenue rose 19% and Google's number of paid search clicks surged 26% from a year earlier.

NEWS: Google shares plunge after earnings miss

At the same time, its so-called cost-per-click metric, which measures the price trajectory of its search ads, fell 9%, continuing a multi-year trend.

The CPC decline once spooked those on Wall Street who asked how long Google's double-digit revenue growth could last if the price of its core product falls from 5% to 10% every quarter.

John Shinal, technology columnist for USA TODAY.(Photo: USA TODAY)

The answer is that Google can make up with massive volume whatever price efficiency its own algorithm can wring out of the online ad business.

Now, the search-software leader is applying its ad-software expertise to the buying and selling of so-called display ads, including text and video ads shown on Android-powered mobile devices.

The resulting price pressure is pinching revenue growth at other Web publishers, even as growth on Google's own sites hums along.

In the first quarter, ad revenue on the company's ! own Web pages rose 21% from a year earlier, while revenue at its network partners rose a mere 4% on that basis.

It was the third-consecutive quarter in which Google's own year-over-year ad revenue growth was more than 20%, while its network partners' growth was less than 5%.

No surprise, then, that the cost Google pays to acquire Web traffic from others fell to 23.3% of revenue — the lowest percentage in at least three years, according to the company's securities filings.

Meanwhile, Yahoo CEO Marissa Mayer said Tuesday her company's traffic-acquisition costs are expected to rise this year.

It's hard to compete with software that gives online advertisers more clicks per ad and more ads per dollar every year.

Housing Construction Increases In September

Housing starts rose 6.3% last month, primarily due to construction of multi-family units, according to this morning's update from the US Census Bureau. The single-family slice of starts, by contrast, rose just 1.1% last month vs. August. The multi-family growth bias looks set to persist, based on the September data for newly issued housing permits. New permits overall rose a tepid 1.7% last month as single-family permits retreated 0.5%; fresh authorization to build multi units of five or more, however, jumped 7.0% in September vs. August. It's fair to say that the housing market's growth rate has slowed in general and that's not likely to change anytime soon. But the key point in today's report remains upbeat, albeit moderately so via a gentle tailwind that's blowing in residential construction activity.

[Related -A Pair Of Bullish Surprises: Jobless Claims & Industrial Production]

The trend doesn't look impressive, at least not by recent standards. But it's clear that the bias for expansion remains intact. The year-over-year pace for housing starts accelerated last month to 17.8%–more than double the annual rate of increase through August. But the yearly gain for permits decelerated to a sluggish 2.5% rise, which suggests that the growth in starts will moderate in the months ahead.

[Related -Fear Poll: Fed/QE, Ebola and Technicals Top Worry List]

The fact that housing is still expanding is the main takeaway in today's release. It's been clear for some time that the recovery in this crucial corner of the economy has been trending lower. The latest numbers suggest a degree of resiliency, however. The upbeat trend is even more encouraging in the wake of yesterday's surprisingly strong numbers for initial jobless claims and industrial production.

"The trend in starts continues to be up," the chief economist at Nationwide Insurance tells Bloomberg. "As the job market's gotten better, as the mortgage rates have remained low and in the last week gone even lower, the underlying demand for single-family homes has improved," according to David Berson.

It remains to be seen if the ill winds blowing in from Europe will take a sizable bite out of the US expansion in the weeks and months ahead. But based on this the latest numbers, it's clear that the American economy remains in a moderate growth mode. As a result, it's still reasonable to argue that business cycle risk for the US remains low.

Hedge Funds Love These 5 Stocks -- but Should You?

Hedge Funds Love These 5 Stocks -- but Should You?

BALTIMORE (Stockpickr) -- Looking to pare down your stock portfolio as the market drops? Not so fast.

Must Read: 10 Stocks George Soros Is Buying

At the same time that retail investors have been selling stocks out of concerns of a top, hedge funds have been buying them -- albeit a little more selectively than in the last few years. What's interesting is that the sectors funds were piling into in the third quarter are the same sectors that got hit the hardest in the third quarter: energy and materials. While others, such as health care, have been relative strength champs in recent months.

(Hedge funds are also taking gains on the high-performing financial sector right now.)

Put simply, funds are ramping up exposure to what's working, but they're also willing to grab onto sectors that could be starting to get oversold. Most important, the position sizes that funds took in the third quarter were much smaller than their bets in previous periods of 2014. That implies that the few names the "smart money" is picking up at this stage are the high-conviction bets.

So which names are pro investors piling into? And which still make sense to buy now? Today we'll answer both of those questions by peeking at the latest round of 13F filings.

Institutional investors with more than $100 million in assets are required to file a 13F, a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

In total, approximately 3,800 firms file 13F forms each quarter, and by comparing one quarter's filing with another, we can see how fund managers are moving their portfolios around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $20.5 trillion under management.

And since it's still very early in 13F season, we're able to use a small sampling of early filers to get a sneak peek at what funds are doing before the rest of the forms hit the SEC's servers.

Today, we'll focus on hedge funds' 5 favorite stocks.

Must Read: Warren Buffett's Top 10 Dividend Stocks

Range Resources

Up first is large-cap oil and gas exploration stock Range Resources (RRC). Like the rest of the energy sector, Range has been getting shellacked in recent months, selling off more than 25% since the calendar flipped to January of this year.

But fund managers are getting confident as Range slips lower; early-filing funds picked up 7.91 million shares of the E&P, bringing their total position to $636 million. Range Resources is the definition of a conviction bet. These funds quintupled their holdings in this stock during the third quarter of 2014.

As an independent exploration and production firm, Range's job is to pull energy commodities out of the ground. The firm's energy projects are based in the U.S., with 2 million acres in stakes across the Marcellus Shale, Mid-Continent and Permian Basin. The firm's 8.2 trillion cubic feet of gas equivalent in proved reserves is skewed heavily towards natural gas (approximately 70%). Given the multiyear bear in nat gas, and comparatively high price of crude, investors have been hungry for low-cost nat gas producers who can benefit disproportionately from higher prices in gas.

Range owns some of the most attractive positioning in North America, with productive properties in some of the most sought-after regions of the continent. The firm also hasn't been shy about selling off assets for the right price. Given RRC's deep portfolio of reserves, the possibility of new asset sales could unlock value quickly.

In my view, the energy sector has further to fall -- potentially a lot further. But once commodity prices show signs of a bottom, RRC becomes a bargain-priced way to play a rebound. With that in mind, I think funds are early on this trade. Don't make the same mistake.

Must Read: 7 Stocks Warren Buffett Is Selling in 2014

Eli Lilly

Pharma giant Eli Lilly (LLY), on the other hand, has been having a solid year in 2014, with s hares up almost 24% so far. The health care sector has been one of the few shining stars in the last few months, and pharmaceutical names such as Lilly provide an easy way to ride the trend and capture a fat dividend yield at the same time (LLY pays out 3.1% at current levels). And funds put shares of this drug maker near the top of their buy list in the third quarter as a result. During the quarter, funds picked up 761,010 shares of the firm, a $48 million bet at current price levels.

Historically, Eli Lilly has been one of a small group of high-performing drug names. The firm's pharmaceuticals include well-known names such as depression and fibromyalgia treatment Cymbalta, diabetes drug Humulin and erectile disfunction treatment Cialis. Like many of its peers, Lilly has a big set of black clouds in the firm of a patent cliff. As the firm's branded drugs get closer to expiration, Lilly is under pressure to get more of its pipeline closer to commercialization to fill that gap. That said, recent patent losses have proven "less bad" than Wall Street expected, and new indications for existing drugs is helping Lilly extend its shelf life. As a new wave of drugs comes off of trials and into the market, the firm should be able to regain any interim shortfall in revenues.

Financially, LLY is in good shape. The firm's $11.78 billion in cash and investments easily offsets a $5.3 billion debt load, providing enough net cash to cover nearly 10% of the firm's market capitalization today. That's a big risk reducer for investors concerned about the stability of Lilly's dividend here.

At current levels, Lilly isn't cheap, but it's not particularly expensive either -- and its big payout and health care sector exposure should help keep it an outperformer this year.

Must Read: 10 Stocks Carl Icahn Loves in 2014

iShares Core U.S. Aggregate Bond Fund

Interestingly enough, one of the biggest conviction stock bets from hedge funds last quarter wasn't a stock at all but an exchange-traded fund. I'm talking about the iShares Core U.S. Aggregate Bond Fund (AGG). Hedge funds picked up more than 3.6 million shares of the fund last quarter, more than doubling their exposure to this large ETF. And I think that remains a good move today.

Why the ETF?

Put simply, you won't find a better (or cheaper) way to get exposure to U.S. investment-grade fixed income than with AGG. This fund owns bonds (primarily long-term), more than two thirds of which are backed by the U.S. government. That exposure gives AGG minimal exposure to the risk of default, and instead makes it more of a play on interest rates. The real beauty of AGG is that it provides that bond exposure with a tiny 0.08% expense ratio and an extremely liquid trading vehicle.

Even though most investors are still counting on a rate hike in the near-term, this environment just doesn't support it. Instead, the rate hike commentary looks more like an attempt at a self-fulfilling prophecy by the Fed. The possibility of lower interest rates six months from now seems insane today on its face, but if recent history is any indication it's actually quite likely. AGG is one of the best ways to play it.

Must Read: 10 Stocks Billionaire John Paulson Loves in 2014

Mosaic

Fertilizer company Mosaic (MOS) is another commodity-linked stock that hedge funds piled into in the third quarter. All told, early-filing funds added 9.69 million shares of the $15.5 billion name to their portfolios during the period, more than doubling their ownership of this ag stock.

Mosaic is the world's largest producer of phosphate and potash fertilizers. The firm is vertically integrated, involved in everything from mining to production to wholesale distribution. Size is a big advantage in the asset-intense fertilizer business, and MOS' huge scale means that it's able to have a meaningful impact on industry-wide supply (and thus prices). But while that mitigates the problems at Mosaic right now, it doesn't solve them.

Soft commodity prices have been falling hard alongside energy prices in recent months, slammed by a rallying dollar and tentative central bank efforts overseas. And as farmers get closer to their cost of production right here, the incentives shift away from growing more until prices react to that supply shortage. In the intermediate term, that could spell revenue shortfalls at MOS, particularly as farmers wrap up growing season this fall and start thinking about their fertilizer needs for next year.

I'd suggest avoiding Mosaic here.

Must Read: 12 Stocks Warren Buffett Loves in 2014

Microsoft

Last up on funds buy list is Microsoft (MSFT). This $360 billion software giant has evolved into one of the staid blue chip names of the technology sector, so it's no surprise that it was one of the few tech stocks that hedge funds picked up (as a sector, funds actually cut their net exposure to tech in the third quarter). Year-to-date, MSFT has seen a slow and consistent climb higher, in contrast to the more active momentum names that have seen boom and bust cycles in 2014 -- but even though Microsoft hasn't been as drama-filled, its business is still undergoing big changes.

In recent years, Microsoft has worked hard to boost its exposure to "side businesses" like mobile phones, tablets, and gaming systems. Even though those efforts have been pretty hit-or-miss, Microsoft can afford to experiment in that space. That's because the firm's bread and butter is still the Windows operating system and Office suite of productivity tools. Commercial sales make up nearly 60% of all revenues as of this past year, and those enterprise sales have been strengthening, even as competition remains a challenge on the consumer side of the business. That sales cushion from Microsoft's Windows and Office franchises is an important luxury for management in 2014.

Financially speaking, cash is another important luxury. Microsoft currently carries more than $100 billion in cash and investments on its balance sheet, versus a $22 billion debt load. That balance sheet position covers more than 21% of Microsoft's current market capitalization today, and gives the firm an ex-cash P/E ratio of just 13. That's a bargain-priced valuation, even if Microsoft isn't the most exciting stock in the sector.

Last quarter, funds added 527,530 shares of Microsoft to their portfolios. That looks like a bet that should outperform the S&P in the fourth quarter.

Must Read: Warren Buffett's Top 10 Dividend Stocks

To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.



-- Written by Jonas Elmerraji in Baltimore.

RELATED LINKS:

>>5 Rocket Stocks to Buy for a Shaky Market

>>5 Hated Earnings Stocks You Should Love

>>5 Breakout Trades Beating the Market's Slump

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in the names mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to

TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

Cheaper Oil, Strong Dollar Push Import Prices Lower

Andrew Harrer/Bloomberg via Getty Images WASHINGTON -- U.S. import prices fell in September for the third straight month as the cost of petroleum products declined and a strong dollar made it cheaper for Americans to buy goods from the European Union. The Labor Department said Friday import prices fell 0.5 percent last month. Economists polled by Reuters had forecast import prices declining 0.7 percent. Export prices fell 0.2 percent during the month. The European Central Bank has stepped up efforts this year to pull the eurozone out of an economic crisis, which has pushed down the value of the euro against the dollar. In September, prices for imports from the European Union fell 0.9 percent, the biggest one-month decline since December 2012. While the U.S. economy has accelerated in recent months, the global economy has appeared to slow, including in China, and the price of oil has weakened. The cost of imported oil for the United States fell 2 percent in September. Weak import prices are holding down U.S. inflation, which is keeping the Federal Reserve wary of rushing to raise interest rates.

Why Bank of America is a Better Bet Than JPMorgan Chase

During the past six months of trading JPMorgan Chase (JPM) and Bank of America (BAC) have been running neck and neck: JPMorgan has dropped 2.3%, while Bank of America has fallen 1.9%.

But just because their return have been similar during the past six months doesn’t mean investors should treat them similarly. In fact, UBS analyst Brennan Hawken and team decided now is the time to favor Bank of America over JPMorgan.

AFP/Getty Images

Hawken explains why he downgraded JPMorgan to Neutral from Buy…

We are downgrading JPMorgan as there is not sufficient upside to our price target and we are unconvinced that JPMorgan’s multiple will expand in the current environment. We continue to believe JPMorgan has an outstanding franchise and is a very well-run bank. However, we would prefer to own earnings recovery stories, as we believe they present more opportunities for alpha than the stable franchises. Specifically, given the secular pressures on the business plus the nearly insatiable appetite for fines by regulators, we would rather not be reliant on the environment improving.

…and upgraded Bank of America to Buy from Neutral:

We are upgrading BofA to Buy, as we believe that BofA is well positioned moving forward given its leverage to rising rates, more stable funding base, non-environmental earnings drivers, and capacity to expand its return of capital to shareholders. Specifically, we believe BofA’s more stable and sticky funding base enhances its leverage to rising rates, particularly to a move in the short end of the curve. We analyzed BofA’s deposit base, with its higher proportion of core deposits and estimate they have a lower deposit beta than other money centers. So we expect that BofA will actually be under less pressure to pass on rate increases to deposit holders resulting in higher long-term earnings power from higher rates.

Hawken lifted his Bank of America price target to $20 from $16.80, while leaving his $64 price target on JPMorgan unchanged.

Bank of America has gained 0.3% to $16.86 at 3:18 p.m. today, while JPMorgan Chase has dropped 0.7% to $58.98.

9 Hidden Wedding Expenses that Caught Me by Surprise

Getty Images

Anyone who has planned or will plan a wedding can empathize with the horror of seeing expenses creep over their budget. The Knot revealed that the average 2013 wedding cost $29,858 -- and that's not including honeymoon expenses. In my hometown, Los Angeles, the average cost to host a wedding is $38,735 -- and that only makes it the 11th most expensive place in the U.S. to get married, according to the survey. My wedding isn't until November 2015, but my fiance and I mapped out a 27-month engagement that would give us time save money for the event. Like any newly engaged couple, we asked ourselves how much we were willing to spend on our big day, but we knew that our large Filipino families would expect us to extend invitations to distant relatives and friends with six degrees of separation from us. My mom's contribution to the list of guests we needed to invite, for example, included one of her high school friends, that friend's entire family and her friend's daughter's long-term boyfriend. Some friends recommended that we dodge a traditional wedding by eloping on the cheap. This would save us from spending the equivalent of a home down payment on a single night, but we knew the importance of tempering family cultural expectations with our modest budget.