With investors concerned that trouble from the high yield debt market could spread into other sectors, shares of Encana Corporation (USA) (NYSE:ECA), GoPro Inc (NASDAQ:GPRO), Range Resources Corp. (NYSE:RRC), and Atara Biotherapeutics Inc (NASDAQ:ATRA) have fallen even further than the S&P 500 index this morning, for various reasons. Let’s find out why and examine relevant hedge fund sentiment towards these equities.
Why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming 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 back-tests 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 38-month period beginning from September 2012, returning 102% (see the details here).
With the price of front-month natural gas contracts at Henry Hub down by 6% in morning trading, shares of Encana Corporation (USA) (NYSE:ECA) are weak and getting weaker. Despite the company promising to cut its 2016 capital expenditures budget by 25% to $1.5 billion-to-$1.7 billion (from 2015’s $2.2 billion), shares of Encana Corporation (USA) (NYSE:ECA) have fallen by 8.86%. Investors worry that the company’s cash flow and profits will shrink if natural gas prices fall further. They also worry that the dividend isn’t sustainable if natural gas prices stay low. Encana cut its quarterly dividend to $0.06 per share from $0.07 per share on Monday in a move that will save it $185 million a year, but it may need to cut it further if natural gas and WTI prices continue tanking. Despite the fall, hedge fund sentiment in Encana has been stable. Of the close to 730 elite funds that we track, 27 funds were long Encana shares as of September 30, up by one from June 30.
The bad news just keeps getting worse for GoPro Inc (NASDAQ:GPRO) shareholders, as the value of the action camera maker’s stock fell by another 14.46% in morning trading today. This time around, investors are selling because analysts at Morgan Stanley downgraded the stock to ‘Underweight’ from ‘Equal Weight’ and lowered their price target for the stock to just $12 per share from $23 per share. Morgan Stanley analysts think GoPro could trade for as little as $5 per share if the pricing headwinds that the camera maker faces continue. GoPro lacks the ecosystem that more integrated hardware-software makers such as Apple Inc. (NASDAQ:AAPL) have. That being said, the downgrade isn’t exactly surprising, as GoPro Inc (NASDAQ:GPRO) has been a momentum stock on the way up out of the IPO gates and now on the way down and investment bank analysts have basically been drawing sloping lines each way to set their price targets. From that perspective, more analyst downgrades could be ahead, although if the stock falls far enough, GoPro becomes a value play at some point. 25 elite funds in our database were long 5.8% of the company’s float at the end of the third quarter.
On the next page, we examine why Range Resources Corp and Atara Biotherapeutics Inc. are also sinking today.