In what has been another volatile day with the S&P 500 down by almost 0.9%, shares of Office Depot Inc (NASDAQ:ODP), Staples, Inc. (NASDAQ:SPLS), Threshold Pharmaceuticals, Inc. (NASDAQ:THLD), AK Steel Holding Corporation (NYSE:AKS), and Micron Technology, Inc. (NASDAQ:MU) have declined even further. Let’s take a closer look at why investors are selling.
In addition, let’s also analyze what hedge funds think about these stocks. 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 36 month period beginning from September 2012 (see the details here).
First up is Office Depot Inc (NASDAQ:ODP), whose stock fell over 13% after the New York Post reported that Federal regulators would reject Office Depot Inc (NASDAQ:ODP)’s merger with office supply chain Staples, Inc. (NASDAQ:SPLS), whose stock is also down over 8% on the day. Staples originally offered to buy Office Depot for $7.25 in cash plus 0.2188 shares of Staples, Inc. (NASDAQ:SPLS) for each share of Office Depot in February. If completed, management estimates that the merger will yield up to $750 million in annual run-rate synergies. Federal regulators have had their doubts on the merger because of competition concerns, given that Office Depot and Staples make up a substantial portion of the bulk office supply market. The smart money has been bullish on Office Depot, with 47 funds (out of the around 730 we track) long the stock at the end of the third quarter. A total of 54 funds were long Staples during the same time period.
In other news, Threshold Pharmaceuticals, Inc. (NASDAQ:THLD) is off by 81% after the company’s lead product candidate, evofosfamide, failed to meet its primary endpoints in two separate Phase 3 trials. Threshold Pharmaceuticals, Inc. (NASDAQ:THLD)’s evofosfamide plus gemcitabin failed to improve overall survival versus gemcitabin and placebo for treatment-naive patients with metastatic or advanced unresectable pancreatic cancer in one trial, while evofosfamide plus doxorubicin failed to show statistically valid improvement in overall survival over doxorubicin in another trial. Because of the data, co-partner Merck KGaA has scrapped its commercialization plans for the drug.
On the next page, we examine why AK Steel and Micron are lower.