It’s December 4, and commodity markets are on edge as OPEC meets in Vienna to discuss their production policy in the face of the crude glut. The S&P has also been volatile recently as the Federal Reserve prepares to raise interest rates for the first time in seven years. Given the state of the markets, it’s not surprising that Whiting Petroleum Corp (NYSE:WLL), Seadrill Ltd (NYSE:SDRL), GoPro Inc (NASDAQ:GPRO), Barnes & Noble, Inc. (NYSE:BKS), and Vale SA (ADR) (NYSE:VALE) are off considerably. Let’s take a closer look at why investors are selling.
In addition, let’s also analyze relevant hedge fund sentiment toward the stocks. 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 environment. 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).
First up are Seadrill Ltd (NYSE:SDRL) and Whiting Petroleum Corp (NYSE:WLL), which are down by 5% and 8%, respectively, after OPEC decided to raise its production output ceiling to 31.5 million barrels per day from the previous 30 million barrels per day. OPEC’s raise affirms Saudi Arabia’s goal of keeping crude prices low long enough to drive weaker marginal supply off the market. The low Brent prices have certainly taken their toll on Seadrill Ltd (NYSE:SDRL), whose stock price has declined by over half this year alone. Whiting Petroleum Corp (NYSE:WLL) hasn’t done any better, with its stock down 52% year-to-date. Both companies have liquidity, but need crude prices to rise in order to be cash flow positive and profitable. According to our database of around 730 elite funds, 42 funds were long Whiting Petroleum and 23 funds were long Seadrill at the end of September.
On the next page, we examine why Vale, Barnes & Noble, and GoPro are off.