Hedge Funds Think Only One Of These Two Stocks that Released Earnings Is A Buy

PepsiCo, Inc. (NYSE:PEP) and Mohawk Industries, Inc. (NYSE:MHK) recently reported earnings for their latest fiscal quarters. PepsiCo beat both earnings and revenue expectations, while Mohawk Industries beat earnings expectations, but fell short on revenues. In this way, PepsiCo’s stock is up more than 3% in pre-market trading, while shares of Mohawk are unchanged. Let’s take a closer look at their earnings reports and examine what the smart money thinks of them.

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Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. However, our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that a particular type of hedge funds’ long positions actually outperformed the market. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read more details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

PepsiCo, Inc. (NYSE:PEP) earned $1.35 per share on revenues of $16.33 billion, beating expectations of $1.26 in EPS on revenues of $16.15 billion. Organic revenue grew 7.4% year over year, while core gross margin rose 120 basis points for the quarter.

“We are pleased with our performance for the third quarter of 2015. Despite ongoing volatility in many of our key international markets, we delivered strong organic revenue growth, gross margin expansion and double-digit core constant currency EPS growth.”

Constant currency EPS growth was a solid 14% for the quarter and should be 9% for the year. Management is doing a good job at controlling costs and returning capital. The company is on track to realize $1 billion in productivity savings and to return $9 billion in capital to its shareholders this year. The company is also on schedule to deliver $5 billion in productivity savings by 2020. Shares are up 7% year to date and yield an attractive 2.9% dividend.

According to our data, hedge funds were cautious towards PepsiCo, Inc. (NYSE:PEP) as they amassed just 5.10% of the company. A total of 57 funds reported stakes worth $7.08 billion in the latest round of 13F filings, versus 61 funds and $8.02 billion respectively a quarter earlier. Donald Yacktman‘s Yacktman Asset Management trimmed its position by 13% to 22.35 million shares, while Boykin Curry’s Eagle Capital Management lowered its holding by 7% to 8.1 million shares. Activist investor Nelson Peltz of Trian Partners, who has been pushing for a split of PepsiCo’s snacks business, kept his stake the same at 18.32 million shares.

Mohawk Industries, Inc. (NYSE:MHK) reported $2.69 in EPS on revenues of $2.04 billion, versus expectations of $2.62 in EPS on revenues of $1.95 billion. Adjusted operating margin rose 2.4% to 14% due to a better sales mix and productivity gains. EPS would have risen 7% had it not been for the strong dollar. The company said:

“Our business is benefiting from years of thoughtful investments in new equipment and acquisitions. In addition to being the world’s largest flooring manufacturer, we have the most comprehensive product portfolio with the best brands and assets. Looking ahead, we anticipate the U.S. economy will continue to improve, strengthening both the residential and commercial flooring markets. During the third quarter, we anticipate that U.S. sales and margins in all of our product categories will improve over last year. Though foreign currency is creating significant headwinds, most of our markets are improving and we are growing on a local basis.”

Mohawk expects third quarter earnings to be in the range of $2.91 – $2.99 per share. Shares of Mohawk have rallied more than 25% year to date. Mohawk could grow further as the U.S. housing market strengthens, but the weakening global economy is a concern.

According to our data, hedge funds were bullish on Mohawk Industries, Inc. (NYSE:MHK) in the second quarter as they amassed 27.90% of the company. A total of 59 funds reported stakes worth $3.89 billion as of the end of June, up from 56 funds and $3.77 billion respectively a quarter earlier. Andreas Halvorsen‘s Viking Global trimmed its position by 2%, but still had 4.31 million shares, while Daniel S. Och’s OZ Management upped its stake by 48% to 2.66 million shares and Dan Loeb’s Third Point raised its holding by 32% to 2.4 million shares.

Disclosure: None