Source: InvestorPlace unless otherwise noted
Investor’s Business Daily regularly runs a feature called Top Funds’ Latest Sells. Specifically, the newspaper publishes a list of equities in which many more of the best-performing stock funds are selling than buying. In general, stock funds tend to determine the direction of individual names. Moreover, top funds often have access to much more information and data than individual retail investors. Consequently, it’s quite useful for long-term investors to know which stocks most major, top-performing funds are selling. I recommend that investors unload these stocks dropped by funds in the third quarter. I’ve described powerful, negative catalysts for each stock as well.
In Q3, 45 funds sold property/casualty insurer Chubb (NYSE:CB), while only nine acquired CB stock.
Earlier this month, Goldman Sachs downgraded its rating on CB from “buy” to “neutral” citing its caution on “commercial line insurers.”
Chubb’s “core operating income” jumped to $4.95 in Q3, up from $3.13 during the same period a year earlier.
However, perhaps boding poorly for its longer term outlook, the company’s underwriting income dropped to $1.3 billion from $1.43 billion in the previous quarter. Also noteworthy is that insurers’ catastrophe losses are expected to intensify over the long term due to climate change.
The stock’s trailing price/earnings ratio of 14 is not especially cheap, while its dividend yield of 1.4% is nothing to write home about.
In Q3, 24 top-performing funds unloaded Chipotle’s (NYSE:CMG) stock, while only 15 bought the name.
Valuation is likely a major concern for funds regarding Chipotle as its forward price-earnings ratio is 43. That’s a very steep valuation for a restaurant stock.
Meanwhile, Bank of America recently identified CMG as the “most crowded” stock within the consumer discretionary sector. Specifically, the bank stated that 26% of all funds own the name.
The dichotomy between the Bank of America note and the Investor’s Business Daily report could indicate that top funds are selling the name ahead of a significant decline by the overbought shares.
Also noteworthy is that CMG has steep competition, as Taco Bell, Qdoba, and Moe’s Southwest Grill are just some of the many Mexican-inspired food chains with which CMG competes.
In Q3, 64 top funds unloaded health insurer UnitedHealth (NYSE:UNH), while only 29 such funds bought the name.
The status of UNH as one of the stocks dropped by most funds turned out to be quite justified as UNH stock recently dropped to its lowest levels since September, driven by concerns about higher costs and lower margins for UNH and its peers.
Indeed, the operating margin of the company’s core UnitedHealthcare health insurer slipped to 4.4% last year from 7.7% in 2022. Moreover, its medical care ratio—the revenue it spent on its clients’ medical care—increased to 83.2% last year versus 82% in 2022.
While the company’s top line jumped 14% last quarter versus the same period a year earlier, and its earnings per share climbed about 16% year-over-year, the Street was not pleased about its margins issues.
Adding fuel to the fire was the profit warning UNH’s competitor, Humana (NYSE:HUM), issued on Jan. 18. Specifically, HUM cut its adjusted full-year earnings per share guidance to $26.09 from “at least” $28.25. The firm cited higher medical costs as the key reason for the revision.
Given rapidly rising drug costs, the quickly escalating costs of healthcare costs in general, and the fairly quick aging of the U.S. population, higher medical costs could indeed continue to plague UNH and its peers going forward.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.