The Dire News That Has These Five Stocks Falling Today

At a time when the broader index is up by half-a-percent, shares of TreeHouse Foods Inc. (NYSE:THS), Arista Networks Inc (NYSE:ANET), Ellie Mae Inc (NYSE:ELLI), Chipotle Mexican Grill, Inc. (NYSE:CMG), and Ecolab Inc. (NYSE:ECL) are falling. Let’s take a closer look and see what hedge funds think of the five falling stocks.

Why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37-month period beginning from September 2012, returning 102% (see the details here).

TreeHouse Foods Inc. (NYSE:THS) shares are off by 5.35% in morning trading after the company pre-released some of its third quarter financial figures, with management expecting EPS of $0.85-to-$0.86 on revenues of $799 million, versus expectations of $0.82 in EPS on revenues of $842.12 million. TreeHouse Foods also announced that it will buy ConAgra Foods Inc (NYSE:CAG)’ private label operations for $2.7 billion. ConAgra Foods’ private label operations has been a troublesome division in recent years and shares of TreeHouse could be selling off because the price TreeHouse is paying is higher-than-expected. It remains to be seen whether TreeHouse can do a better job monetizing the asset than ConAgra did. Hedge funds are growing more optimistic about TreeHouse, however. According to our data, 19 funds out of the 730 elite funds we track reported stakes worth $296.9 million in TreeHouse as the end of June, up from just 13 funds with $162.73 million in shares at the end of March.

Arista Networks Inc (NYSE:ANET) is down by 4% after analysts at Goldman Sachs downgraded the company to ‘Sell’ from ‘Neutral’. Shares of the cloud networking solutions company have retraced substantially from their highs in June as sentiment around the stock becomes less optimistic. Our data shows that hedge funds were mixed on Arista Networks Inc (NYSE:ANET) in the second quarter. Although the number of funds long Arista decreased to 20 from 22, the total value of their holdings in the stock increased to $306.33 million from $197.86 million. Stephen Mandel‘s Lone Pine Capital owned 1.9 million shares at the end of June.

Ellie Mae Inc (NYSE:ELLI) is down by 3.34% as some investors take profits on the stock. Shares of the on-demand residential mortgage software provider were up by 81% year-to-date before Monday’s fall, as the U.S housing industry bounces back from the Great Recession due to low interest rates and falling unemployment. Hedge funds are bullish on Ellie Mae. 22 funds reported stakes in Ellie Mae worth $303.83 million as the end of June, up from 18 funds and $244.56 million respectively at the end of March. Alex Sacerdote‘s Whale Rock Capital Management owned 1.12 million shares at the end of the second quarter. 

On the next page, we examine why Chipotle and Ecolab are falling.

Chipotle Mexican Grill, Inc. (NYSE:CMG) is off by 3.3% after the company shut down 43 restaurants in Oregon and Washington due to a potential E-coli outbreak. Analysts suspect the fresh produce products of a local Chipotle supplier may have been contaminated. Given Chipotle has a total of 1,931 restaurants, the company closing 43 restaurants for a period of time isn’t going to negatively affect the top and bottom line earnings very much, although it remains to be seen whether the outbreak will lower demand for other stores as well. Investors don’t think it will, however, as the stock has rebounded from its morning lows (when the stock was off by as much as 5%).

Hedge funds were bearish on Chipotle Mexican Grill, Inc. (NYSE:CMG) in the second quarter. A total of 36 funds reported holding stakes in the stock worth $884.43 million, amounting to 4.70% of the outstanding shares, versus 37 funds with ownership of $1.15 billion in shares a quarter earlier. Jim Simons‘ Renaissance Technologies held 313,500 shares.

Ecolab Inc. (NYSE:ECL) is down by 4% in morning trading after the company reported third quarter earnings of $1.28 per share on revenue of $3.45 billion, meeting profit expectations but missing revenue estimates by $90 million. Guidance is a bit soft as the strong dollar weighs on business, with management expecting EPS of $4.35-to-$4.45 for 2015, versus the previous guidance of $4.45-to-$4.60. Shares are still up by 10% year-to-date and should do well once energy prices and emerging markets rebound. 23 funds we track reported Ecolab stakes worth $2.25 billion as of the end of June, with Michael Larson‘s Bill & Melinda Gates Foundation Trust owning 4.37 million shares.

Disclosure: None