Despite today’s healthy jobless claims report, the stock market has inched down since the bell, with the shares of Sunedison Inc (NYSE:SUNE), Freeport-McMoRan Inc (NYSE:FCX), Chesapeake Energy Corporation (NYSE:CHK), ArcelorMittal SA (ADR) (NYSE:MT), and Derma Sciences Inc (NASDAQ:DSCI) are among the top losers. Let’s take a closer look at the reasons behind their declines.
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 37 months and outperformed the S&P 500 Index by 53 percentage points (see more details here).
Sunedison Inc (NYSE:SUNE) fell by over 10% in early morning trading before rallying back to some 3% in the red, after the analysts at Axiom Capital downgraded the company, stating that investors no longer believe management’s forward guidance after the string of bad misses. Sunedison Inc (NYSE:SUNE) shares remain extremely volatile after the company reported disappointing third quarter earnings. Axiom has a ‘Sell’ rating and a $2 price target. Our data show many hedge fund managers, including John Hempton and David Einhorn disagree with Axiom (see Einhorn’s recent comments on Sunedison). Of the around 730 elite funds we track, 93 funds owned $5.68 billion of Sunedison’s shares on June 30, accounting for 69.10% of the float.
In other news, Freeport-McMoRan Inc (NYSE:FCX) has lost 5.37% as copper prices remain weak due to soft global macro-economic conditions. Although the Chinese stock market has rallied substantially from its August bottom, copper prices hit a six year low today, with the commodity trading for $2.183 a pound in New York. The analysts at Goldman Sachs don’t think copper prices will rally much over the next two years, with the investment bank forecasting copper prices to fall to $4,800 a ton by December 30, 2015 and $4,500 a ton by the end of 2016. Weak copper prices mean softer revenues for Freeport-McMoRan Inc (NYSE:FCX). Activist investor Carl Icahn is betting on Freeport-McMoRan and went activist on the company a couple of months ago (see article)
On the next page, we examine why Chesapeake Energy Corporation, ArcelorMittal, and Derma Sciences are down.
Chesapeake Energy Corporation (NYSE:CHK) was off by as much as 4.5% in morning trade before rallying to being down 1.22% as shares remain volatile given the low natural gas prices. With the price of the commodity trading for just $2.27/mcf at Henry Hub, natural gas spot prices are not as strong as the bulls had hoped as warmer weather and higher-than-expected inventories weigh on sentiment. Although Chesapeake Energy Corporation (NYSE:CHK) shares are down 66% year-to-date, shares remain attractive for long term investors given the cheap valuation. Carl Icahn’s Icahn Capital LP owned 73.05 million shares of Chesapeake at the end of June.
On a separate matter, ArcelorMittal SA (ADR) (NYSE:MT) is down by 5.6% as investors become less optimistic on the stock’s future. The world’s largest steel maker reported a disappointing $711 million loss for third quarter, as demand fell due to a weakening Chinese economy. ArcelorMittal SA (ADR) (NYSE:MT) management also cut guidance and suspended the dividend. Shares are down by more than 50% year-to-date. Bulls hope China’s economy can recover quickly so steel demand can come back.
Last but not least, shares of Derma Sciences Inc (NASDAQ:DSCI) has slid by 27% after the company announced it will terminate Phase 3 clinical trials that evaluate aclerastide for diabetic foot ulcers healing.
“This action is based on futility determinations conducted by the Data Monitoring Committee (DMC) for the planned, pre-specified interim analyses regarding the primary efficacy endpoint of confirmed complete wound closure of the target ulcer within 12 weeks of the start of treatment. The decision to end the studies followed the recommendation by the DMC to stop enrollment in the studies. … We are also halting all development work with DSC127 in scar reduction and radiation dermatitis. The development program termination eliminates a projected cash burn of approximately $5 million per quarter in 2016,” the company said in a statement.
Derma Sciences plans to focus its attention to grow its advanced wound care net sales and increase its margins. The company had $49.4 million of cash and $12 million of long-term investments as of September 30. Our data shows hedge funds are bullish on Derma Sciences Inc (NASDAQ:DSCI). A total of 17 funds owned $113.18 million of Derma Sciences shares at the end of the second quarter, accounting for 61.40% of the float.