Owing to a sharp decline in profits for the second quarter, a gloomy forecast for the current one, and doubts cast on a planned spinoff, shares of Canadian Solar Inc. (NASDAQ:CSIQ) have plummeted by over 19% in trading today. The third-largest solar panel maker posted net income in the second quarter of $17.9 million, or $0.31 per share, significantly down from the $55.8 million, or $0.95 per share, it earned in the same quarter last year. The earnings were however, still above the $0.13 per share profit analysts were expecting. Regardless, the market appears to be more concerned with the significantly lower profit, the lighter guidance issued for the third quarter, and the creeping uncertainty about a planned spinoff of the company’s power-generating assets into a yieldco. Revenues for the second quarter grew over 2% on the year to $636.7 million, above estimates of $592.5 million. However, for the third quarter, Canadian Solar expects to report revenues of between $570 million and $620 million, below the almost $670 million analysts were expecting. The firm’s decline after its second quarter report is akin to how Sunedison Inc (NYSE:SUNE)’s stock dropped precipitously after its latest quarterly report in the first week of August, when it reported a loss of $0.89 per share for its own second quarter.
It should also be noted that the gloomy third quarter forecast comes after hedge funds were colder to Canadian Solar in the second quarter, as we will see below. However, why are we interested in the 13F filings of a select group of hedge funds? We use these filings to determine the top 15 small-cap stocks held by these elite funds based on 16 years of research that showed their top small-cap picks are much more profitable than both their large-cap stocks and the broader market as a whole. These small-cap stocks beat the S&P 500 Total Return Index by an average of nearly one percentage point per month in our backtests, which were conducted over the period of 1999 to 2012. Moreover, since the beginning of forward testing from August 2012, the strategy worked just as our research predicted, outperforming the market every year and returning 118% over the last 35 months, which is more than 60 percentage points higher than the returns of the S&P500 ETF (SPY) (see more details).
As Canadian Solar Inc. (NASDAQ:CSIQ) is a small-cap stock, Insider Monkey is especially interested in looking at how hedge funds are trading the company’s shares, as well as developments from within the company to gauge whether the stock has the potential to be a good investment at the moment. The renewable energy firm, during its conference call, also cast doubts on its planned spinoff of a dividend-paying growth company, traditionally known as a yieldco. While Chief Executive Officer Shawn Qu said in the conference call that the firm is “on track for launch” of the yieldco, which will own power-generating assets of the firm, Chief Financial Officer Michael Potter said that the company has “alternative plans”, since the market has shown volatility towards yieldcos. The planned spinoff cut the firm’s revenue growth in the just-ended quarter, as it did not sell completed renewable energy facilities like it used to, to prepare the yieldco’s future portfolio of assets.
Apart from the lower guidance and the doubts about the planned spinoff, Canadian Solar Inc. (NASDAQ:CSIQ) saw a decrease of hedge fund support in the second quarter, with 31 hedge funds long in the stock by the end of June, down by four from the previous quarter. This decrease also reflects the 22.37% drop in hedge fund holdings from the previous quarter, to $235.49 million. The stock declined by 14.35% in the second quarter, but this does not account for the entire decrease in hedge funds’ holdings in the quarter. The loss of interest from the smart money comes after a 176.41% surge in holdings in the first quarter. Nonetheless, nearly 15% of the company’s shares are still owned by hedge funds we track.
Israel Englander’s Millennium Management remained the institution with the largest position in Canadian Solar Inc. (NASDAQ:CSIQ) in the second quarter, increasing its stake by 47% to 2.12 million shares worth about $60.58 million. Meanwhile, the most bearish hedge fund in the second quarter among the over 700 we track was Donald Chiboucis’ Columbus Circle Investors, which divested almost 1.6 million shares from April to June, retaining just 1.02 million shares. Because of the negative news from Canadian Solar Inc. (NASDAQ:CSIQ) and the lukewarm treatment of the stock by hedge funds in the second quarter, we recommend staying away from the stock at the moment.