Hedge Fund Sentiment Says These Falling Stocks Are Good Buys

Page 1 of 2

Among the largest decliners today are Sonic Corporation (NASDAQ:SONC), down by a little over 8%, CONN’s, Inc. (NASDAQ:CONN), slipping by just under 5%, and Raptor Pharmaceutical Corp. (NASDAQ:RPTP), falling by more than 5% so far in the day. Let’s look at the actions causing the downward movements in these stocks and whether hedge funds seeing any redeeming qualities in them.


Starting with Sonic Corporation (NASDAQ:SONC), the restaurant chain announced its same-store sales numbers for fiscal year 2015 yesterday, which has resulted in an 8% dip in the stock today. Sonic Corporation reported that its same-store sales were up by 7.3% for fiscal year 2015 which ended on August 31, as the company’s drive-in sales were up by 6.9% and its franchise drive-in sales rose by 7.3%.  The company also reported a 4.9% growth in same-store sales for the fourth quarter of fiscal 2015. The company expects the same-store sales to grow by just 2-4% during fiscal 2016. It was likely the latter point which was not received well by investors and has led to the stock decline today.

Let’s take a look at hedge fund activity on Sonic Corporation (NASDAQ:SONC) now. By the end of June, there were 24 hedge funds with an aggregate investment of $185.4 million in the stock. The number of bullish hedge funds increased from 21 at the end of first quarter and the total investments went up from $130.9 million, despite a 10% decrease in shares during the second trimester, so hedge funds were rather bullish on this stock overall. Hedge funds in our database also held around 12.4% of the company’s outstanding shares. Among the hedge funds that we track, Richard Chilton’s Chilton Investment Company leads the way with 2.2 million shares valued at $65.5 million as of June 30. Israel Englander‘s Millennium Management increased its holding in the stock by 133% to 1.1 million shares during the same period. Among the hedge funds that opened fresh positions in the stock were Dmitry Balyasny’s Balyasny Asset Management, which opened a new position of around 620,000 shares.

An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like a fund with the knowledge and resources of Millenium can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012. Since officially launching our small-cap strategy in August 2012 it has performed just as predicted, beating the market by over 60 percentage points and returning 118%, while hedge funds themselves have collectively underperformed the market (read the details here).

Page 1 of 2