With the S&P 500 down slightly, shares of Flextronics International Ltd. (NASDAQ:FLEX), Energy Recovery, Inc. (NASDAQ:ERII), Schlumberger Limited. (NYSE:SLB), SanDisk Corporation (NASDAQ:SNDK), and Western Digital Corp (NASDAQ:WDC) are all trending in morning trading on various pieces of news, some connected. Let’s take a look at the catalysts causing the market’s interest in these stocks as well as the sentiment of elite investors towards them.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Flextronics International Ltd. (NASDAQ:FLEX) is up by 4.9% in after reporting second quarter earnings of $0.27 per share on revenues of $6.32 billion after the market closed yesterday, beating estimates of $0.25 in EPS and estimated revenues of $6.17 billion. Management expects third quarter revenue to be in the range of $6.2 billion-to-$6.8 billion and adjusted EPS to be in the range of $0.28-to-$0.34 per diluted share, in-line with estimates. Shares are up by 5% year-to-date and trade at a reasonable 9.5 times forward earnings. Of the 730 elite funds we track, 29 of them owned $1.41 billion of the company’s shares (accounting for 22.10% of the float) on June 30, versus 33 funds with $1.76 billion in shares held on March 31. Larry Robbins‘ Glenview Capital owns 75.13 million shares.
Energy Recovery, Inc. (NASDAQ:ERII) is up by an astounding 133% in morning trading after the company announced that it won a 15-year, $125 million contract from Schlumberger Limited. (NYSE:SLB) to provide the exclusive rights to the company’s VorTeq hydraulic pumping systems to the oil services giant. Under the terms of the contract, Energy Recovery, Inc. (NASDAQ:ERII) will get $75 million immediately and will receive two separate $25 million milestone payments, subject to performance indicators in 2016. Energy Recovery is also entitled to continuing annual royalties contingent on certain key performance indicators for the duration of the contract. Schlumberger is using Energy Recovery’s systems because they reduce the number of pumps needed for a fracking job and could save Schlumberger as much as $5 per barrel on those jobs.
The deal is a win for both companies. It saves Schlumberger money, and it gives Energy Recovery valuable cash to continue to grow. Before today’s rally, Energy Recovery shares were down by 53% year-to-date because demand waned as many frackers cut their capital expenditures budgets due to low crude prices. The deal hopefully gives Energy Recovery enough runway to make it to a time when crude prices are substantially higher.
We like Schlumberger Limited. (NYSE:SLB) for the long term, as it is the leading oil services provider in the world. It has healthy free cash flow and pays a decent dividend of 2.7%. Like Energy Recovery, Schlumberger will do well when crude prices recover. Ken Fisher’s Fisher Asset Management owns 4.24 million shares.
On the next page, we take a closer look at the activity concerning SanDisk and Western Digital.
SanDisk Corporation (NASDAQ:SNDK) has rallied by 8.7% after Bloomberg published a report stating that SanDisk is in ‘advanced talks to sell itself’ to Western Digital Corp (NASDAQ:WDC) and that a deal could come as early as this week. The article says Western Digital is ‘discussing a price of between $80 and $90 per SanDisk share’. BusinessKorea previously published a report stating ‘there is fierce competition between global semiconductor companies to buy SanDisk’. Given the Bloomberg report, it seems Western Digital Corp might be the winner in the sweepstakes. There has been a wave of M&A activity in recent quarters as the era of cheap debt comes to an end. If Western Digital Corp acquires SanDisk, it remains to be seen whether management can find enough synergies to make the deal worthwhile. Western Digital Corp currently trades at 10.8 times forward earnings, and has benefited enormously from cloud storage growth, which has offset PC’s secular decline. By buying SanDisk, Western Digital Corp will further diversify.