Why Did These Stocks Move Higher On Tuesday And Should You Follow The Crowd?

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With the markets barely moving up on Tuesday as investors await the next round of earnings, a number of stocks stood out, increasing significantly in the first hours of trading. In this article, we will take a closer look at five stocks that are trending today and examine the news that sparked their performance and assess whether the hedge fund sentiment suggests that they will keep their momentum over the long run or not.

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We consider hedge fund sentiment to be an important metric when assessing the long-term potential of a stock, because this type of investor spends a lot of resources to identify the next stock to invest in. Even though in the last few years hedge funds collectively have lagged the market, we have determined that their long positions have performed much better. Moreover, our investing strategy takes into account the long positions of over 700 hedge funds in the small-cap space, and it has returned 102% in the last three years, beating the S&P 500 ETF (SPY) by some 53 percentage points (see more details here).

With this in mind, let’s take a look at the stocks that have been gaining ground on Tuesday, starting with Aoxing Pharmaceutical Company Inc (NYSEMKT:AXN), a micro-cap pharmaceutical company that focuses on the development and production of pain-management products. Aoxing’s stock has advanced by over 5% today after the company reported its financial results for the fiscal year 2015, ended June 30. The company had its first profitable year since its foundation in 2002, as it delivered a net income of $0.09 per share, compared to a net loss of $0.16 per share a year earlier, while doubling its sales to $25.48 million from $12.74 million in fiscal year 2014. This improvement is most likely to attract the attention of hedge funds, who have overlooked the company so far. The only fund we track that held shares of Aoxing Pharmaceutical Company Inc (NYSEMKT:AXN) at the end of June was Cliff Asness’ AQR Capital Management, which initiated a stake of 45,700 shares worth $80,000 during the second quarter. On the other hand, Jim Simons‘ Renaissance Technologies sold out its position of 11,300 shares in Aoxing Pharmaceutical Company Inc (NYSEMKT:AXN).

China Jo-Jo Drugstores Inc (NASDAQ:CJJD) is another small company whose stock has rallied today. It currently trades over 11% in the green, slightly lower than at the market’s opening. The stock of the China-based drugstore operator has spiked after the company posted a 438% annual surge in sales via its official branded online pharmacy, for the first six months of fiscal 2016, with the consolidated gross profit margin coming in at 25%. China Jo-Jo Drugstores Inc (NASDAQ:CJJD) was included in the equity portfolios of two hedge funds from our database, both of whom boosted their positions between April and June. Richard Driehaus’ Driehaus Capital increased its stake by 60% to 175,377 shares, while Renaissance Technologies more than doubled its holding to 86,100 shares. Overall, both funds owned $875,000 worth of China Jo-Jo Drugstores Inc (NASDAQ:CJJD)’s outstanding stock.

2U Inc (NASDAQ:TWOU) has slightly recovered from yesterday’s 18% slump, although it has lost the morning gains and currently trades around 0.30% in the red. Yesterday, Citron Research issued a report on the company, setting a short-term price target of $14 per share. Among the main weaknesses that Citron outlined was the fact that despite 2U Inc (NASDAQ:TWOU) being founded eight years ago, it still generates around 85% of its revenue from only four clients. 2U brands itself as a SaaS company, but in reality it is a for-profit outsourced online degree provider, according to Citron. However, hedge funds have been excessively optimistic (in comparison to Citron) as 13 funds reported long positions with an aggregate value of $53.95 million, representing roughly 4% of the company at the end of June. For example, Donald Chiboucis’ Columbus Circle Investors added 465,497 shares to its stake in 2U Inc (NASDAQ:TWOU) during the second quarter, reporting ownership of 494,818 shares in its latest 13F filing.

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