It’s a Tuesday to forget for investors of Southwest Airlines Co (NYSE:LUV), QUALCOMM, Inc. (NASDAQ:QCOM), Staples, Inc. (NASDAQ:SPLS), and Kinder Morgan Inc (NYSE:KMI), as shares of the four companies are off considerably more than the S&P 500 this morning. Let’s take a closer look at why the stocks are falling. In addition, let’s also analyze relevant hedge fund sentiment toward the stocks.
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 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
First on our list of decliners is Southwest Airlines Co (NYSE:LUV), whose stock fell by 8% in morning trading after the discount airline reported revenue passenger miles increasing by 13.9% year-over-year to 9.7 billion in November and capacity rising by 9.7% to 11.7 billion available seat miles for the month. The company expects fourth quarter revenue per available seat mile to be flat-to-down by 1.0 percentage point, due to cheaper fares. Rising industry capacity is always a concern for investors as excess capacity historically gets airlines in trouble when the economy turns. For now however, that’s not a problem, as the U.S economy is strong and crude prices are low. As long as capacity of other airlines doesn’t rise faster than GDP over the next few years, look for Southwest Airlines Co (NYSE:LUV) to bounce back. Hedge funds are also optimistic. 54 elite funds in our database were long Southwest following the third quarter, up from 50 at the end of June.
Next up on our list is mobile chip maker QUALCOMM, Inc. (NASDAQ:QCOM), whose shares are off by 4% after European Union regulators accused the company of abusing its power to gain market share. If Qualcomm loses its case, it faces potential fines of upwards of $2.7 billion, or 10% of the company’s 2014 worldwide revenue. QUALCOMM, Inc. (NASDAQ:QCOM) previously settled anti-competitive complaints in China for $975 million in February but still faces an ongoing licensing price complaint in South Korea. Although Qualcomm’s tens of billions of cash on its balance sheet allow it to pay its fines easily, investors fear the European Union might enforce additional restrictions that reduce Qualcomm’s cash flow from that region.
For all the negatives, hedge funds are resoundingly bullish on the company, with 68 elite funds holding 7.3% of Qualcomm’s float at the end of September. Among the believers is Barry Rosenstein‘s JANA Partners, with a holding of 28.55 million shares. Shares trade at 10.6-times forward earnings.
On the next page, we examine the latest news concerning Staples and Kinder Morgan.