FMC Corp (NYSE:FMC) is down 4% and Ryder System, Inc. (NYSE:R) fell by 7.3% in the first hour of trading after both companies had provided lower than expected guidance for their upcoming third-quarter earnings reports. Given guidance warnings often play a pivotal role in deciding the future direction of stocks, let’s take a closer look at the two companies’ forecasts and examine what the smart money thinks of them.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see more details here).
FMC Corp (NYSE:FMC) shares are down more than 33% year to date as the strong dollar negatively affected the company’s international earnings and weak agricultural commodity prices softened the demand for the firm’s products. FMC Corp has missed revenue expectations for four quarters in a row, and given yesterday’s guidance cut, it seems third quarter won’t be any different.
“FMC Corporation (FMC) today announced that, due to the recent rapid devaluation of the Brazilian real, the company is reducing third-quarter and full-year outlook for its Agricultural Solutions segment. The company expects third-quarter segment earnings of $59 million and fourth-quarter segment earnings to be in the range of $110 to $130 million. Assuming an adjusted tax rate of 27 percent, adjusted earnings are expected to be $0.38 per share for the third quarter and in the range of $2.35 to $2.45 per share for the full year.”
FMC’s outlook is lower than analyst expectations of $0.64 in EPS for the third quarter and $3.02 for the full fiscal year. We think FMC shareholders will be okay in the long run, however, as crude prices will bounce back because the Middle East doesn’t run of $50 Brent. When crude prices bounce back, the Brazilian real will appreciate, and FMC’s demand and EPS will rebound.
Our data show that hedge funds are bullish on FMC Corp (NYSE:FMC) as they amassed almost 14% of the company during the second quarter. The total value of hedge funds’ holdings in the stock increased to $973.6 million at the end of June from $803.95 million at the end of March. Moreover, nine out of the top ten shareholders from our database that are long FMC, either increased their stakes or established new positions in the stock between April and June. For example, Alexander Roepers‘ Atlantic Investment Management increased its position by 38% to 5.24 million shares, while Larry Robbins’ Glenview Capital raised its stake by 182% to 4.81 million shares. Neil Chriss’ Hutchin Hill Capital established a new position of 451,700 shares.