With all three indexes still in the green before the Federal Reserve begins raising rates, shares of Arch Coal Inc (NYSE:ACI), Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR), Itau Unibanco Holding SA (ADR) (NYSE:ITUB), Banco Bradesco SA (ADR) (NYSE:BBD), and Ambev SA (ADR) (NYSE:ABEV) are well in the red because of various catalysts. Let’s take a closer look at why investors are selling.
Moreover, we will also examine relevant hedge fund sentiment toward the equities. But 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 36 month period beginning from September 2012 (see the details here).
Arch Coal Inc (NYSE:ACI) shares are off 18% as the stock remains highly volatile. Yesterday, the coal miner delayed a $90 million bond interest payment to buy more time for a Hail Mary to occur, but given the falling natural gas prices and the Paris climate accord signed last weekend, any good news might be too little and too late for the company. The analysts at BB&T capital markets expect Arch to file for bankruptcy this year as the company’s $5 billion in long-term debt weighs heavily on the Arch’s operations. If it does file, Arch will be the fourth miner to file for bankruptcy protection this year. Shares of the company are down by over 95% year-to-date. According to our data, 9 funds owned around 11.4% of Arch Coal Inc (NYSE:ACI)’s float as of September 30.
In other news, Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) shares have fallen by 4.5% in morning trading as crude prices retreat. As of 11:30 AM Eastern time, the front-month WTI futures contract is off by 4.2% and the February Brent futures contract is down by 3.24% because the EIA reported that U.S. crude inventories rose by 4.8 million barrels last week versus the expectation of a 1.4 million barrel drawdown. Because of the build-up, the U.S. has 490.7 million barrels of crude inventory, a number not seen this time of the year in at least the last 80 years. If crude prices are to make a fundamental rebound, crude inventories need to head South in a major way soon. A total of 24 funds from our database were long Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) at the end of the third quarter, with Ken Fisher’s Fisher Asset Management among them.
On the next page, we examine Ambev SA (ADR) (NYSE:ABEV), Itau Unibanco Holding SA (ADR), and Banco Bradesco SA (ADR).