What’s the Deal With These 4 Slumping Stocks?

Shares of Hertz Global Holdings Inc (NYSE:HTZ), Headwaters Inc (NYSE:HW), Targa Resources Corp (NYSE:TRGP), and Cognex Corporation (NASDAQ:CGNX) are falling hard today because of various negative catalysts that have driven some investors to the exits. Let’s take a closer look at those catalysts and examine what hedge funds think of each stock.

Hertz Global Holdings Inc (NYSE:HTZ) is off by 4.5% in afternoon trading because competitor Avis Budget Group Inc. (NASDAQ:CAR) reported disappointing third quarter earnings of $1.98 per share on revenues of $2.58 billion. In addition, Avis Budget Group’s guidance was a little soft, with management expecting 2015 EPS of $3.10-to-$3.25, while analysts had been anticipating $3.36 per share. Because the same fundamental factors (such as a strong dollar and increasing ride sharing usage) affect Hertz as they do Avis, investors fear Hertz will report a disappointing third quarter too.

Nevertheless, our data shows the smart money is bullish on Hertz Global Holdings Inc (NYSE:HTZ). Of the 730 elite funds we track, 67 of those funds owned $4.06 billion worth of the company’s shares, accounting for an impressive 48.90% of the float on June 30, with Carl Icahn’s Icahn Capital LP among them, with the activist investor owning a stake of 51.92 million shares.

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 37 month period beginning from September 2012, returning 102% (see the details here).

Headwaters Inc (NYSE:HW) is off by 8.63% after reporting fiscal fourth quarter of 2015 earnings of $0.51 per share on revenues of $272.72 million, beating estimates by $0.06 per share and $3.76 million, respectively. Revenues in the company’s building products division rose by 5% year-over-year, while sales in the construction materials segment jumped by 14% year-over-year. Organic growth was 11% in the quarter. Management sees a healthy fiscal year 2016 ahead, as margins expand due to realized synergies from bolt-on acquisitions and increased sales from newly launched products. This wasn’t a bad quarter, and shares could be retracing because the company didn’t beat the whisper number on the street. Shares are still up by 25% year-to-date. 23 funds owned $203.26 million of Headwaters Inc (NYSE:HW)’s shares on June 30.

On the next page, we examine why Targa Resources and Cognex Corporation shares are trading down this afternoon.

Targa Resources Corp (NYSE:TRGP) is off by 7.8% after reporting third quarter earnings of $0.23 per share on revenues of $1.63 billion, with the revenues down by 28.8% year-over-year. Both marks widely missed analysts’ expectations. In addition, Targa Resources announced that it will acquire the common units of Targa Resources Partners LP (NYSE:NGLS) in a $6.67 billion dollar deal in which Targa Resources will give Targa Resources Partners’ shareholders 0.62 common shares of TRGP for each share of NGLS they own. Management believes the all-equity deal, which is expected to close in the first quarter of 2016, will be immediately accretive to shareholders and will help the company achieve 15% 2016 dividend growth and greater than 10% estimated compound annual dividend growth from 2015-to-2018. Given the dividend yield of over 6%, shares certainly look appetizing, although some investors are likely holding off until WTI and natural gas prices firm up so that industry volumes have better visibility. 22 funds owned $293.1 million of Targa Resources Corp (NYSE:TRGP)’s shares at the end of the second quarter, with Leon Cooperman‘s Omega Advisors among them, owning a stake of 1.77 million shares.

Cognex Corporation (NASDAQ:CGNX) is off by almost 10% after it reported third quarter earnings of $0.29 per share on revenues of $107.58 million, beating profit estimates by $0.07 per share and meeting revenue expectations despite them falling by 36.5% year-over-year. Shares are off because guidance was weaker than expected, with management expecting fourth quarter revenue of $94 million-to-$97 million, versus expectations of $111.3 million. 22 funds in our database owned $242.46 million worth of Cognex Corporation (NASDAQ:CGNX) shares on June 30, accounting for just 5.8% of the float. Chuck Royce‘s Royce & Associates owned a stake of 2.73 million shares at the end of the second quarter. Analysts are a little bit more upbeat, with a consensus price target of $47.33, believing shares have 24.56% upside potential from present levels.

Disclosure: None