With markets slightly in the red on Wednesday, a number of stocks stood out as they are plunging in afternoon trading. In this article we will focus on Cepheid (NASDAQ:CPHD), BofI Holding, Inc. (NASDAQ:BOFI), Colfax Corp (NYSE:CFX), Sarepta Therapeutics Inc (NASDAQ:SRPT), and Hannon Armstrong Sustnbl Infrstr Cap Inc (NYSE:HASI), whose stocks are losing ground for various reasons. Let’s take a closer look at the news that sparked the declines of these stocks and see if the hedge fund sentiment can suggest any profitable opportunities.
But why do we track the smart money activity? From one point of view we can argue that hedge funds consistently lag when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our backtests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 37-month period beginning from September 2012 (read more details here).
Shares of Cepheid (NASDAQ:CPHD) are down 17.8% after the company released preliminary third quarter results that underwhelmed. The company expects third quarter GAAP net loss to be $0.13 per share, mainly because of lower gross margin. The company also expects revenues of $126.5 million, lower than the estimate of $127.6 million.
“The primary driver was mix, with a higher proportion of lower-margin HBDC business and less commercial business than we projected. In addition, we incurred higher than expected manufacturing costs associated with the ramp-up to volume of our newest virology tests,” CEO John Bishop said in a statement.
At its present state, there could be some support at the $30 level, but the company needs to bump up its revenue growth and margins before investors can get excited again. According to our database of around 730 elite funds, collectively they were more optimistic on Cepheid (NASDAQ:CPHD) at the end of the second quarter as they amassed nearly 5% of the company. A total of 17 funds reported stakes worth $200.77 million as of the end of June, down from 15 funds with $138.28 million worth of stock a quarter earlier.
BofI Holding, Inc. (NASDAQ:BOFI) has declined by 24% after a former auditor of the bank said the company was cutting corners and perhaps doing wrongdoing. The former auditor hinted that the bank’s borrowers “may have included foreign nationals who might be off-limits under federal anti-money-laundering laws,” The New York Times reported. Given that other banks have paid steep fines for violating such laws, investors are selling first and asking questions later. Potential regulatory scrutiny is never good, particularly for a bank whose stock trails a forward P/E of 17. BofI is fighting the claims and if it escapes regulatory/SEC scrutiny, the stock could bounce back.
Colfax Corp (NYSE:CFX) is down 7.8% on strong volume on the back of the company reporting its quarterly results that missed the Street’s earnings and revenue expectations. For the third quarter, the company earned $0.24 per share and revenue of $969.14 million, versus estimates of $0.41 and $994.3 million respectively. The company’s backlog fell to $1.31 billion in the third quarter from $1.36 a quarter earlier, as the demand from emerging markets, which make up almost half of the company’s business, declined. The strong dollar negatively affected the results, but Colfax is also seeing organic decreases in the existing businesses. We would stay on the sidelines and wait until there are green shoots in the emerging markets and signs of a potential trough in demand before considering the stock as a potential investment.
In the next page, we examine why SRPT and HASI are dropping.