Is Finisar Corporation (NASDAQ:FNSR) a good stock to buy? The company’s share price has dropped over 10% in today’s trading session after it reported a massive drop in earnings on Thursday. For its fiscal fourth quarter of 2015, which ended May 3, 2015, Finisar Corporation reported earnings of $7.3 million, or $0.07 per share, substantially down from $28.8 million, or $0.28 per share, in the year-ago quarter. Adjusted earnings also slid to $26.9 million, or $0.25 per share, from $37.5 million, or $0.36 per share, in the same quarter last year. According to Thomson Reuters, the consensus was for adjusted earnings of $0.25 per share. The drop in EPS was despite an increase in revenues to $320.04 million from $306.03 million in the year-ago quarter, a slight miss on the expected revenues $320.50 million. It should be said, however, that investors should pay attention to a recent increase in enthusiasm in Finisar Corporation (NASDAQ:FNSR) from smart money, which we’ll look at in this article.
First, a quick word about why we track hedge fund activity and insider sentiment. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers, returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 144% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).
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In terms of insider sentiment, we see Finisar Corporation (NASDAQ:FNSR) Executive Vice President of Global Operations, Joseph Young, sold 2,200 shares of the company this month. Executive Chairman of the Board, Jerry Rawls, also sold 62,499 shares in April, split between two trades.
With this in mind, let’s examine the latest action among hedge funds in our database surrounding Finisar Corporation (NASDAQ:FNSR).