At a time when the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) is in the red and the forward month WTI contract is well in the green, shares of Azure Midstream Partners, LP Common Units Limited Partnership (NYSE:AZUR), Memorial Production Partners LP (NASDAQ:MEMP), Sorrento Therapeutics Inc (NASDAQ:SRNE), China Information Technology, Inc. – Ordinary Shares (NASDAQ:CNIT), and Bonanza Creek Energy Inc (NYSE:BCEI) are surging on the back of different catalysts. In this article, we will examine the catalysts and analyze relevant hedge fund sentiment toward each stock.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 39 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
Azure Midstream Partners, LP Common Units Limited Partnership (NYSE:AZUR) and Memorial Production Partners LP (NASDAQ:MEMP) are up by 42% and 15.8%, respectively, in afternoon trading as investors become more optimistic on the beaten-up midstream energy space. Driving the recent bullishness is the news that Oneok Partners LP (NYSE:OKS) expects to maintain its dividend payout, investment grade credit rating, and share count for next year. Investors had been selling any and all midstream securities on the fear that their energy transportation companies would follow Kinder Morgan Inc (NYSE:KMI)’s footsteps and cut the dividend distribution substantially in favor of preserving future growth. With the news that Oneok Partners LP will basically maintain business as usual, many investors are hopeful that their securities will cut the dividend modestly or not at all.
Although Memorial Production Partners LP (NASDAQ:MEMP) and Azure Midstream Partners, LP (NYSE:AZUR)’s dividend distributions don’t seem sustainable, investors could be buying today because of improving sentiment and some short investors covering to realize gains before the fourth quarter draws to a close. If crude prices rebound, there would also be more reasons to own each stock.
Shares of Sorrento Therapeutics Inc (NASDAQ:SRNE) are once again in rally mode, this time up 18.7% on the news that the analysts at FBR Capital have initiated an ‘Outperform’ rating on it, with a $22 price target. Sorrento Therapeutics Inc (NASDAQ:SRNE) is a biotech company that develops monoclonal antibodies primarily concerning cancer. Shares of the company rallied all the way to $26 per share on the news that billionaire Patrick Soon-Shiong had taken a 20% stake in Sorrento earlier in the year, but promptly retraced because of the lack of positive catalysts. Among the 13 elite funds that owned shares of Sorrento is Cliff Asness’ AQR Capital Management with a stake of 121,831 shares as of the end of September.
On the next page, we examine China Information Technology and Bonanza Creek Energy.