With U.S factory growth coming in at its slowest rate in two years, shares of XOMA Corp (NASDAQ:XOMA), Arch Coal Inc (NYSE:ACI), Travelport Worldwide Ltd (NYSE:TVPT), and CONN’S, Inc. (NASDAQ:CONN) are surging for various reasons. Let’s find out why investors are buying the four stocks and analyze what hedge funds think of them.
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 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
XOMA Corp (NASDAQ:XOMA) shares are up by more than 23% as sentiment around the company improves. XOMA recently announced that it will initiate a proof-of-concept study for XOMA 358 in patients with congenital hyperinsulinism. Hyperinsulinism can lead to brain damage and affects approximately 1 in 50,000 newborns. The FDA has granted XOMA 358 Orphan Drug Designation, which expedites the approval process for it, although the size of the market is uncertain. Short covering could also be playing a part in today’s rally, as 18.96% of the stock is short. According to our data culled from around 730 elite funds, 20 reported stakes worth $142.16 million, 31.10% of the float, as of the end of June, up from 16 funds with stakes worth $113.23 million at the end of March. Julian Baker and Felix Baker‘s Baker Bros. Advisors owned 14.68 million shares at the end of the second quarter.
Arch Coal Inc (NYSE:ACI) is up by 19.33% as the stock remains very volatile due to its highly leveraged balance sheet and uncertainty over the company’s debt restructuring. Because natural gas prices are near multi-year lows as inventories remain firmly above their five-year averages, coal prices are weak as well, putting pressure on Arch Coal’s ability to service its debt. Investors hope for a colder-than-expected winter and for management to find a way to keep Arch Coal out of bankruptcy. Hedge funds were mixed on Arch Coal Inc (NYSE:ACI) in the second quarter. Although the number of funds owning Arch Coal shares increased to 15 from 13, the total value of their holdings in the stock declined to $6.03 million from $12.78 million. Douglas Dethy‘s DC Capital Partners owned 5 million Arch Coal shares at the end of June.
Want to know why Conn’s and Travelport are surging? Head to the next page to find out.