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David E. Shaw

Small-cap stocks Orchid Island Capital Inc (NYSE:ORC), Sarepta Therapeutics Inc (NASDAQ:SRPT) and First Bancorp (NYSE:FBP) have all dropped by more than 8% so far today. The specialty finance company Orchid Island Capital Inc (NYSE:ORC) has dropped around 8% so far. Medical research company Sarepta Therapeutics Inc (NASDAQ:SRPT) has also lost around 8%, while Maine’s community bank First Bancorp (NYSE:FBP) has lost around 15% since the markets opened this morning. Why was there a huge drop in these stocks and what do hedge funds think about them? Let’s look for the answers.


We track hedge fund and insider activity on stocks mainly to get the perspectives on the stock from the brightest and most knowledgeable minds in the world. Hedge fund managers can use their vast experience to give us a better insight into the stock, but insiders always have that little bit of additional information about a stock, well before the portfolio managers and analysts know about it. So it is very important to keep track of both of these metrics on a stock. Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions actually performed better than the market. Small-cap stocks, activist targets, and spin-offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 85 percentage points since the end of August 2012, returning over 145% (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

Orchid Island Capital Inc (NYSE:ORC) has dropped around 8% so far today mainly due to the nature of its business and the fact that Mortgage REIT’s remain under pressure. The smallest companies in the sector like Orchid Island Capital and a few others were hit hard today. Orchid Island Capital has also plunged 7% in the last week and around 11% in the last four weeks. But what do hedge funds think about this stock?

At the end of the first quarter, a total of six of the hedge funds were holding long position in Orchid Island Capital Inc (NYSE:ORC), a change of 20% from the fourth quarter. But this does not mean that hedge funds were bullish on this stock, because the aggregate capital invested by these hedge funds dropped by 12% to $4.5 million in the first three months of this year. On the contrary the stock had gained about 1.3% in the first three months. This clearly shows that hedge funds were not bullish on the stock, despite the fact that the overall number of hedge funds holding positions in the stock increased. David  E. Shaw‘s D E Shaw holds the largest position in the stock, of around 111,301 shares valued at $1.5 million at the end of the first quarter. But D E Shaw had 195,000 shares valued at $2.5 million at the end of the fourth quarter. Speaking about insider activity on the stock, there was no insider sales of the stock in the last few months, but there were a few insider purchases. Orchid Island Capital CEO Robert Cauley purchased around 3,000 shares in the first quarter. This shows that insiders were bullish on the stock.

David E. Shaw
David E. Shaw
D E Shaw

Medical research and drug development company, Sarepta Therapeutics Inc (NASDAQ:SRPT) lost around 8% of its value so far today. The stock had gained in triple digits (110%) in the month since it had updated the status of its lead drug eteplirsen for Duchenne muscular dystrophy. But why did the stock lose around 8% today? Sarepta announced earlier an agreement with Midcap Financial to borrow up to $40 million at an annual rate of 7.75%. This debt financing deal has apparently not impressed investors, who reacted by selling down the stock from its massive highs. Lets take a look at how hedge funds traded this stock.

Heading into the second quarter, there was a change of 25% in hedge funds holding Sarepta Therapeutics Inc (NASDAQ:SRPT) during the first quarter, with 15 hedge funds holding long positions in the stock at the end of the first quarter. Even though the number of hedge fund holdings in the stock went up by three, there was only a 1.3% increase in aggregate capital invested in the stock by these hedge funds. The stock had lost around 7.5% of its value during the first quarter though, which accounts for the minimal gains and shows funds were bullish on the stock. Looking at the insider activity on the stock, there were no insider sales of the stock, but Sarepta CEO Garabedian Nishan Christopher and Senior VP Edward Kaye purchased around 800 shares each during the first quarter. Joseph Edelman‘s Perceptive Advisors held the largest position in the stock, with around 2.2 million shares valued at $29.3 million at the end of the first quarter.

Joseph Edelman
Joseph Edelman
Perceptive Advisors

Financial Holding Company First Bancorp (NYSE:FBP)’s stock took a huge dip of around 15% so far today. This drop was mainly due to Guggenheim’s downgrade of the stock to a ‘Neutral’ rating from a ‘Buy’ rating. In the last couple of months there were other downgrades too, from both Zachs and TheStreet. But did the hedge funds expect that this stock would plunge like this?

There was no change in the number of hedge funds holding long positions in the stock at the end of the first quarter. But there were a few hedge funds who sold out of their stake in the company and there were a few others who opened up fresh positions in the stock during the first quarter. There was also a 5% increase in aggregate capital invested in the stock by hedge funds we track, to $359.5 million, though the stock jumped by around 7.5% during the same time, indicating that hedge funds were slightly bearish on the stock. There were no insider sales or purchases of the stock over the last few months. Howard Marks‘ Oaktree Capital Management holds the largest position in the stock as of March 31, with 41.8 million shares valued at $259.4 million.

Hedge funds were mildly bearish on Orchid Island Capital and First Bancorp, but hedge funds were positive on Sarepta Therapeutics. Despite the fact that Sarepta Therapeutics has lost around 8% today, the stock had gained around 100% since the beginning of this year, so hedge funds certainly haven’t lost out on anything because of today’s drop and appear to have been correct in their bullish assessment. Orchid and First Bancorp on the other hand have not gained significantly since the beginning of this year, so hedge funds remaining bearish on the stock also seems to have been the wise choice, as it appears they have correctly predicted the short-term performance of all three of today’s big losers.

Disclosure: None

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