With the S&P roughly flat on the day before Thanksgiving, shares of Sunedison Inc (NYSE:SUNE), TerraForm Power Inc (NASDAQ:TERP), Seadrill Ltd (NYSE:SDRL), and HP Inc (NYSE:HPQ) are falling hard for various reasons. Let’s find out why investors are selling. In addition, let’s also analyze how hedge funds view each stock.
After Sunedison Inc (NYSE:SUNE)‘s stock rallied by more than 30% on Tuesday on the news that the company paid down a $95 million margin loan, the analysts at UBS downgraded both SunEdison and its yieldco, TerraForm Power Inc (NASDAQ:TERP), to ‘Sell’. The two solar companies have struggled this year due to liquidity concerns and soft quarterly earnings reports, with Sunedison Inc (NYSE:SUNE)’s shares retreating by 78.88% year-to-date and TerraForm Power Inc (NASDAQ:TERP) off by 70% on the year. Today’s UBS downgrade even in light of the massive declines the stocks have already suffered this year will do little to improve sentiment, as evidenced by the fact that shares of Sunedison and TerraForm Power are down by 12% and 13%, respectively today.
Like analyst sentiment, hedge fund sentiment towards SunEdison has weakened recently, with the total number of hedge funds long the stock dropping to 73 at the end of September from 93 at the end of June. The total number of hedge funds long TerraForm Power also declined to 31 from 46 during the same time. Several hedge funds remain bullish on the two stocks, however, with David Einhorn‘s Greenlight Capital and Larry Robbins‘ Glenview Capital long SunEdison and Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital establishing a new position in Terraform Power in the third quarter.
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 38 month period beginning from September 2012 (see the details here).
On the next page, we examine why Seadrill and HP Inc are dipping lower today.