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Brocade Communications Systems, Inc. (BRCD) And Mellanox Technologies, Ltd. (MLNX) Down On QLogic Corporation (QLGC) Warning

A poor quarterly results announcement from QLogic Corporation (NASDAQ:QLGC) has weighed heavily on the stocks of Brocade Communications Systems, Inc. (NASDAQ:BRCD) and Mellanox Technologies Ltd. (NASDAQ:MLNX). The shares of Brocade Communications and Mellanox Technologies have declined by 6.32% and 4.52% respectively. QLogic is having its steepest fall of 2015, with its shares dropping in excess of 22.64% as of the time of writing. The company is expecting quarterly revenue of $113 million against its previous forecast range of $124 million to $132 million. It is likely to report diluted earnings per share of $0.16 to $0.17 on a non-GAAP basis, which is lower than its previous EPS forecast of $0.23 to $0.27. The network storage company will provide detailed results during its earnings call on July 30. According to the company, weakness in storage and the traditional enterprise server market were among the primary reasons for the lower-than-expected quarterly results, which is clearly weighing on the other companies in the industry now.


The shares of Brocade Communications Systems, Inc. (NASDAQ:BRCD) are currently trading at $11.11, with a year-to-date drop of 6.95%. The networking solutions company reported its fiscal second quarter 2015 financial results on May 21, 2015, reporting revenue of $547 million and 2% year-over-year growth. Its GAAP diluted earnings per share for the quarter was $0.18 against the year-over-year loss of $0.03. Brocade Communications Systems, Inc. (NASDAQ:BRCD) announced a quarterly cash dividend of $0.045 for its shareholders. Smart money maintained a bullish outlook for the company at the end of the first quarter, with 32 hedge fund managers investing $656.21 million, which was higher than the previous end-of-quarter investments of $610.00 million. Cliff Asness’ AQR Capital Management was the largest shareholder of the company in our database, with a holding valued at $190.31 million at the end of the first quarter, owning 16.04 million shares of the company.

Mellanox Technologies Ltd. (NASDAQ:MLNX) is having a depressing day as well, with its shares declining by 4.52% to $43.37 as of the time of writing. The networking product company is going to announce its quarterly results on July 22, 2015 for the fiscal quarter ending on June 30, 2015. Analysts at Zacks Investment Research are expecting earnings per share of $0.33 against last year’s second quarter loss per share of $0.11. The shares of Mellanox Technologies Ltd. (NASDAQ:MLNX) have grown by 1.73% year-to-date. Hedge funds tracked at Insider Monkey had a bullish sentiment for the company during the first quarter as well, with aggregate investments of $387.42 million from 28 hedge fund managers. The net investments were greater than the investments of $347.26 million held three months earlier.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 135% and beating the market by more than 80 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.

The market is clearly betting that the weakness in the sector as reported by QLogic will also be affecting Brocade and Mellanox in the near future, though we can’t take this for granted. Given the bullish smart money sentiment on the two companies (and the bearish sentiment on QLogic), we think it might be a decent opportunity to buy into one or both of these companies at a reduced rate today.

Disclosure: None

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