VMware, Inc. (VMW) , Infosys Ltd ADR (INFY): Why Did These Stocks Fall Today?

At a time when the S&P 500 is flat and the NASDAQ index is up 0.12%, VMware, Inc. (NYSE:VMW) and Infosys Ltd ADR (NYSE:INFY) are down 8.1% and 6.6%, respectively, in afternoon trading. Given Infosys and VMware’s strong volume moves, let’s take a closer look at the two red stocks and examine hedge fund sentiment toward them.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 52 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 56% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Shareholders of VMware, Inc. (NYSE:VMW) are certainly feeling left out after Dell agreed to buy EMC Corporation (NYSE:EMC) for $24.05 a share in cash plus VMware tracking stock. Because Dell is issuing VMware tracking stock to finance part of the deal, VMware’s publicly traded float will increase while demand won’t rise nearly as much. Because supply will increase more than demand, VMware shares are down more 10%. VMware shares could also be off because the company released third quarter guidance of $1.02 in EPS on revenues of $1.672 billion. Although the company beat analyst expectations of $0.99 in EPS on revenues of $1.66 billion, it might have missed the market’s expectations.

Following Monday’s sell off, VMware shares trade at a forward PE of 17.2, roughly in line with the NASDAQ’s forward PE of 17.75. Given VMware’s moat and its solid growth prospects, shares could be a buying opportunity for long term investors.

Hedge funds are divided on VMware, Inc. (NYSE:VMW). Although 35 of the around 730 elite funds we track hold just 2% of the float ($740.12 million) at the end of June, eight of VMware’s top 10 elite fund holders either established new positions or increased their positions in the second quarter. Matt Sirovich and Jeremy Mindich’s Scopia Capital increased its position by 4% to 1.79 million shares while Glenn Russell Dubin‘s Highbridge Capital Management raised its stake by 5% to 624,564 shares. Christopher Medlock James’ Partner Fund Management and Dmitry Balyasny’s Balyasny Asset Management established new positions 841,721 shares and 694,818 shares, respectively.

For its first quarter of 2016, Infosys Ltd ADR (NYSE:INFY) earned $0.23 per share on revenues of $2.39 billion, beating earnings expectations by $0.01 per share and revenue expectations by $50 million. Gross margin fell 0.7% year-over-year to 37.8% while operating expenses increased 8% to $294 million. Guidance was a little bit weaker than expected, as the company trimmed its revenue growth projections for fiscal year 2016 to 6.4%-8.4% from 7.2%-9.2% because of the strong dollar. Nevertheless, the earnings report wasn’t as bad as the market sell-off implied. U. B. Pravin Rao said:

We had strong all-round growth during the quarter driven by recent initiatives around service differentiation, improvement in client mining and higher focus on winning large deals. Increase in revenue productivity was significant, volume growth was robust, client metrics and utilization improved while attrition remained stable.

Shares of Infosys are up 13.6% year to date and trade at a forward PE of 19.4 versus the NASDAQ’s forward PE of 17.75. Given that outsourcing is a secular trend, Infosys’ above average growth won’t go away, although there is limited upside until the dollar weakens against the Rupee or the company grows faster than expectations again.

Our data shows the elite funds we track are ambivalent on Infosys Ltd ADR (NYSE:INFY) as only 17 funds reported stakes worth 2% of the float ($718.4 million) in the second quarter. Ken Fisher‘s Fisher Asset Management owns 21.67 million shares while Cliff Asness’ AQR Capital management owns 11.89 miillion shares.

Analysts are divided on the stock. Five analysts have ‘Hold’ ratings while just two have ‘Buy’ ratings. Overall, the analysts have a consensus price target of $24.37 per share.

Disclosure: None