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Hedge Funds Only Like One of These Two Trending Stocks and Here’s Why You Should Follow Them

With the market relatively quiet in afternoon trading, shares of Freeport-McMoRan Inc (NYSE:FCX) and Republic Airways Holdings Inc. (NASDAQ:RJETare up by 1.8% and 9.2% respectively. Freeport-McMoRan Inc (NYSE:FCX) is rallying because copper futures are up modestly and crude prices are up 2%, while Republic Airways Holdings is advancing because the airline announced it reached a tentative agreement with its airplane pilots over a new three-year labor contract. Let’s take a closer look at the two stocks and see if the smart money agrees with today’s sentiment.


Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by around 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read more details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

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Carl Icahn, who is a major shareholder with a recently established stake of 88 million shares, wants Freeport-McMoRan Inc (NYSE:FCX) to cut capital expenditures, trim executive pay, and discontinue high-cost production. While Freeport-McMoRan management has already cut capital expenditures substantially, they may cut expenses further. Any cost cuts would help Freeport-McMoRan’s liquidity and allow the company to ride out the commodity storm. The company recently raised $1 billion from an at-the-market secondary offering and may raise an additional $1 billion from another offering. With the rally today, investors are hoping Freeport-McMoRan’s liquidity will be enough to last it through the downturn and that Icahn can unlock value for the company’s beleaguered shareholders who have seen the price of their shares fall by 60% year to date, as a weak Chinese economy weighs on copper and crude prices.

Hedge funds like Freeport-McMoRan as 41 of the funds we track owned $581.83 million of the company’s shares (representing 3.00% of the float) on June 30, up from 31 funds and $258.1 million respectively on March 31. Stanley Druckenmiller‘s Duquesne Capital established a new position of 3.55 million shares, while David Shaw’s D.E.Shaw increased its stake by 248% to 3.07 million shares. Moreover, Mario Gabelli’s GAMCO investors raised its stake by 13% to 2.73 million shares, while Ken Griffin’s Citadel Investment Group upped its position by 19% to 2.73 million shares. Brian Riano, John Eckerson, Sean Fahey and Albert Marino’s Claren Road Asset Management established a new stake of 1.65 million shares as well.

Like hedge funds, analysts are bullish on the stock. Currently, 11 analysts have ‘Buy’ ratings, 10 have ‘Hold’ ratings, and two have ‘Sell’ ratings. Among them, RBC Capital has a ‘Sector Perform’ rating with a $14 price target, while Macquarie has a ‘Buy’ rating with a $18 price target. Overall, analysts have a consensus price target of $19.70 per share, giving Freeport-McMoRan a premium of over 117%.

Analysts at UBS think the tentative labor agreement will improve Republic Airways Holdings Inc. (NASDAQ:RJET)‘s profits and increase the stock’s valuation. They upgraded Republic Airways’ stock to ‘Buy’ from ‘Hold’ and raised their target price to $8 from $5 on the back of the development. Republic Airways Holdings shares were down 63% year-to-date before the upgrade.

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