Alcoa Inc (NYSE:AA) reported a net income of $140 million, or $0.10 per share after the close of trading this afternoon, for its second quarter which ended June 30. The firm also reported revenues of $5.9 billion, buoyed by strong organic growth in aerospace, automotive, and alumina businesses. Adjusted earnings for the firm was reported to be $250 million, or $0.19 per share, up 16% from the same quarter in 2014. However, Wall Street was expecting an EPS of $0.22 from the light metals company. The firm beat on the top line, however, as analysts were expecting revenues of $5.81 billion. This miss on earnings is a departure from the beats the company has posted every quarter for the past year. Alcoa hit a low of $10.46 per share today, and closed at $10.50, 5.06% lower than yesterday’s close.
It appears the first miss in some time was predicted by the smart money managers followed by Insider Monkey. At the end of the first quarter, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in Alcoa, down 10% from the prior quarter. Their stakes’ value also went down 34.19% to $1.09 billion by March 31, from $1.65 billion the preceding quarter. This is a significant drop, since the stock only dove 18.18% from January 2 to March 31. The fleeing of capital was wise, as the stock slid a further 13.7% from April 1 to June 30.
Why do we follow hedge fund interest in companies? Professional investors spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, while Karp’s returns have been strong the past two years, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012 in backtesting. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012. A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned more than 135% and beaten the market by more than 80 percentage points since then, and by 4.6 percentage points in the first quarter of this year (see the details).
We also follow insider trades, be they sales or purchases, to measure whether insiders are confident in their company’s shares. For Alcoa, Directors Ratan Tata and Martin Sorrell, and Executive Vice President Christopher Roy Harvey bought 3,405, 3,245 and 57 shares of the company respectively on April 10. Meanwhile, Chairman and CEO Klaus Kleinfeld sold 716,448 shares of the company on January 14.
With all of this in mind, we’re going to take a peek at the recent action surrounding Alcoa Inc on the next page.
Hedge fund activity in Alcoa Inc (NYSE:AA)
Among the hedge funds followed by Insider Monkey, Robert Rodriguez and Steven Romick‘s First Pacific Advisors LLC had the biggest position in Alcoa Inc (NYSE:AA), with 22.14 million shares worth close to $286 million, and corresponding to 2.4% of its total 13F portfolio. Sitting in second is William B. Gray of Orbis Investment Management, with a $264.5 million position of 20.47 million shares; 2.1% of his 13F portfolio is allocated to the stock. Other hedge funds that are bullish include Kerr Neilson’s Platinum Asset Management, David E. Shaw’s D.E. Shaw & Co., L.P., and Israel Englander’s Millennium Management.
Since Alcoa Inc (NYSE:AA) experienced a decline in sentiment from the entirety of the hedge funds we track, we can see that there were a few who sold off their full holdings in the first quarter. Interestingly, Steve Cohen‘s Point72 Asset Management cut the biggest position of all the hedgies tracked by Insider Monkey, 2.65 million shares totaling close to $41.8 million in stock. Stanley Druckenmiller of Duquesne Capital was right behind this move, as the fund sold off 1.88 million shares worth about $29.6 million; two clear warning signs, as two of the best in the business made big exits from the stock.
Because of the earnings miss and the bearish sentiment of smart money on Alcoa Inc (NYSE:AA), we do not recommend a long position in the stock, though we suspect the floor is very near and there is certainly upside potential in it.
Disclosure: None
