Analysts have been busy this week, as they’ve lowered their price targets on Tesla Motors Inc (NASDAQ:TSLA), and Lam Research Corporation (NASDAQ:LRCX), and reiterated their views on General Motors Company (NYSE:GM). While the broader market may worry about rising interest rates, the analysts worry about company specific issues. Let’s examine the analyst notes and see if the smart money agrees with them.
We mention the hedge fund activity concerning the three stocks because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated a double-digit alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).
Adam Jonas of Morgan Stanley recently tempered his enthusiasm for Tesla Motors Inc (NASDAQ:TSLA), lowering his price target to $450 from $465 per share. Jonas thought Tesla’s recently launched Model X was priced too high:
We had very high expectations for the technical capabilities of the vehicle and it appears Tesla has met these expectations. However, the Model X price appears to have an as much as $25k higher average transaction price (ATP) than the Model S and easily $10k to $15k higher than we had expected, based on early list pricing/specification options. Even allowing the Model X ATPs to decline over time through the introduction of lower-spec models leaves what we believe to be a higher-priced vehicle than we expected that may struggle to meet the volume expectations of the market and our forecasts
Jonas still has an ‘Overweight’ rating, however, and believes the company could successfully take on Uber in ride sharing by 2020.
Hedge funds are cautious on Tesla Motors Inc (NASDAQ:TSLA). According to our data, 26 hedge funds owned $1.39 billion worth of the company’s stock, which represented 4.10% of the float at the end of June, versus 29 funds with stakes worth $1.04 billion a quarter earlier. Moreover, among the funds we track, many own positions in ‘Put’ options underlying shares of Tesla. Ken Griffin‘s Citadel Investment Group increased its position of put options by 34% to cover 1.37 million underlying shares in the second quarter, while Paul J. Isaac’s Arbiter Partners Capital Management reported a ‘Put’ options stake underlying 842,000 shares. Overall, 25.94 million shares, or 25.7% of the float, were short on September 15 versus 22.19 million shares on September 15, 2014.
Analysts at RBC Capital Markets recently downgraded Lam Research Corporation (NASDAQ:LRCX) to ‘Underperform’ from ‘Sector Perform’ and lowered their price target to $52 from $76, citing an expected decline in DRAM spending in 2016 and limited 3D NAND growth. RBC believes Lam Research Corporation (NASDAQ:LRCX) will earn just $4 per share for 2016 versus expectations of $6.39 per share. Shares of Lam Research are down by 16.7% year-to-date as investors worry about industry oversupply.
Hedge funds disagree with RBC, as our data shows they were bullish on Lam Research in the second quarter. A total of 48 funds reported stakes worth $1.26 billion (9.8% of the company) in the latest round of 13F filings, versus 49 funds holding $1.19 billion in shares a quarter earlier. Ken Griffin‘s Citadel Investment Group trimmed its position by 16% to 1.96 million shares while David Einhorn’s Greenlight Capital lowered its stake by 2% to 1.64 million shares. Going the other way was Panayotis Takis Sparaggis’ Alkeon Capital Management, which increased its position by 9% to 1.27 million shares.