Three Stocks are Down for Different Reasons; What Do Hedge Funds Think About Their Long-Term Potential?

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Shares of Linn Energy LLC (NASDAQ:LINE), LinnCo LLC (NASDAQ:LNCO), and Adobe Systems Incorporated (NASDAQ:ADBE) are down in extended market trading for various reasons. Linn Energy and LinnCo announced they will suspend their dividends effective September 30 and “will evaluate the Companys ability to reinstate the distribution and dividend on an ongoing basis”. Investors largely foresaw the dividend suspension and shares of the two energy stocks declined by just 2% in after-hours trading on Tuesday. Meanwhile, Adobe’s management provided lower than expected guidance for fiscal year 2016 and its shares were off by 3.88% after the bell. Let’s take a closer look at the three companies and examine how the smart money thinks of them.

Oil Drilling Rig Big

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8000 funds in operation at present, Hedge fund experts at Insider Monkey look at the aristocrats of this group, around 730 funds. Contrary to popular belief Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to beat the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 118% since the end of August 2012 and beat the S&P 500 Index by 60 percentage points (see more details here).

Given that Linn Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO) have substantial amounts of debt (either directly or indirectly), the two securities are very sensitive to crude price changes. Shares of the two energy companies are down by two thirds year-to-date as crude prices are half of what they were in June of 2014. The two securities rallied on Tuesday because traders are buying WTI in anticipation of Russia potentially working with OPEC to better control the supply. Crude needs to rally substantially in order for the two securities to pay dividends again.

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Hedge funds from our database were on the right side of the Linn Energy LLC and LinnCo LLC trade. Our data shows that they owned just 0.20% of Linn Energy LLC (NASDAQ:LINE) in the second quarter, with four funds reporting stakes worth $4.81 million as of June 30, down from $7.18 million a quarter earlier. Boaz Weinstein‘s Saba Capital owned 164,781 shares, but also owned a ‘Put’ position underlying 962,800 shares. Currently around 6.66% of Linn Energy’s float is short.

Like Linn Energy, hedge funds were bearish on LinnCo LLC (NASDAQ:LNCO) as they amassed around 1% of the company heading into the third quarter, while 11.8% of the float is currently short. A total of eight funds held shares worth $12.36 million on June 30, versus seven funds and $16.4 million on March 31. David Costen Haley‘s HBK Investments owned 593,348 shares.

In contrast to the previous two stocks, hedge funds are bullish on Adobe Systems Incorporated (NASDAQ:ADBE). Of the around 730 elite funds we track, 39 funds owned $3.45 billion of the company’s shares (representing 8.60% of the float) on June 30, up from 37 funds and $3.29 billion respectively on March 31. Jeffrey Ubben‘s ValueAct Capital owned 15.7 million shares, while Stephen Mandel’s Lone Pine Capital held 9.26 million shares. Lee Ainslie’s Maverick Capital owns 2.33 million shares too.

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