Markets continued to plummet on the third trading day of the year, with all major U.S. stock indexes in the red in the intraday trading. In this context, a few stocks stood out for their substantial losses. Among them are Chipotle Mexican Grill, Inc. (NYSE:CMG), CONSOL Energy Inc. (NYSE:CNX), Smith & Wesson Holding Corp (NASDAQ:SWHC), ENSCO PLC (NYSE:ESV) and Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR). So, let’s look into the events driving the declines of these stocks and see what the hedge funds in our database think about these companies.
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 have managed to return more than 102% since August 2012 and outperformed the S&P 500 Index by 53 percentage points (see the details here).
Back to Wednesday’s losers, Chipotle Mexican Grill, Inc. (NYSE:CMG) was down roughly 3.75% after the company said it expects comparable-store sales to decline 14.6% in its fourth quarter – results will be reported on February 2. In addition, management disclosed that the company had received a federal subpoena in California, requiring it to produce documents related to a norovirus incident in Simi Valley. On the other hand, Chipotle also announced plans to buy back $300 million in stock; however, the news did not manage to prevent the stock from sliding.
It seems like the E. Coli scare did not only frighten customers, but it also drove hedge funds away. During the third quarter, the number of hedge funds (among those in our database) with long stakes in Chipotle Mexican Grill, Inc. (NYSE:CMG) fell to 28 from 36. However, Jim Simons’ Renaissance Technologies is still bullish on the stock, as it boosted its stake by 53% over the third quarter to 479,400 shares.
CONSOL Energy Inc. (NYSE:CNX) saw an even larger decline on Wednesday. The small cap energy company’s stock is down more than 10.5% after management trimmed its 2016 coal sales and exploration and production capital expenditure outlook, in a weakening commodity backdrop.
“CONSOL’s updated 2016 plan reflects the company’s operational flexibility to respond effectively to the continued weakness in commodity prices, as well as the company’s commitment to de-lever the balance sheet through the execution of the organic free cash flow plan,” CEO Nicholas DeIuliis assured in a press release.
CONSOL Energy Inc. (NYSE:CNX) saw the hedge fund interest increase over the last reported quarter. As of September 30, 2015, the company saw 25 hedge fund backers – among the institutions that we track, up from 23 a quarter earlier. Interestingly, these funds held almost 40% of the company’s total shares outstanding; Mason Hawkins’ Southeastern Asset Management has the largest stake, comprising more than 46.39 million shares, valued at over $454 million.
On the next page we will look into the reasons behind ENSCO, Petrobras, and Smith & Wesson’s declines.
Up next is Smith & Wesson Holding Corp (NASDAQ:SWHC), whose stock is down by almost 4% on Wednesday, as President Obama prepared to roll out a series of executive actions on gun control. In addition, Wedbush downgraded the company’s stock to ‘Neutral’ from ‘Outperform’ on Wednesday, arguing that, “While gun industry sales are clearly in ‘surge’ mode, it is difficult to discern just how much of these sales are in fact incremental to the industry versus pulled-forward demand, with plenty of historical examples of both. Hence, given a healthy valuation and a stock that is up more than 150% over the past year (vs. -1% for the S&P),” the experts recommended to take profits and sell the stock.
Despite Wednesday’s tumble, shares of Smith & Wesson Holding Corp (NASDAQ:SWHC) have gained more than 47% since the end of the third quarter of 2015, and it looks like the smart money saw it coming. Among the institutions in our database, 30 disclosed long positions in the company as of the end of September, up from 22 at the end of June. In this group, we should highlight Israel Englander’s Millennium Management, which last declared having more than tripled its stake in the company, taking it to almost 1.2 million shares, worth about $20 million.
Finally, ENSCO PLC (NYSE:ESV) and Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) are down by 7.7% and 4.2%, respectively, amid news about the companies having ended a drill ship contract amidst low oil prices.
As of the end of the third quarter, 29 funds among those we track held long stakes in ENSCO, including Adage Capital Management. The fund managed by Phill Gross And Robert Atchinson last declared holding 5.2 million shares of the company.
On the other hand, Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) saw the hedge fund interest decline to 24 funds long as of the end of the third quarter from 31 funds by the end of the second quarter. Among them, we could highlight Ken Fisher’s Fisher Asset Management, which held 9.64 million shares as of September 30, 2015.
Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.