Orchid Island Capital Inc (NYSE:ORC) saw its stock plunge to as low as $9.33 today or 18.73% lower than the $11.48 closing price of the shares yesterday after the specialty finance company announced a reduction of its monthly dividend for July 2015. The firm announced a $0.14 per share dividend for the month, a sizable 22.22% drop from the previous $0.18 per share monthly dividend, which had been paid out for over a year straight. “The reduction was the result of elevated prepayment speeds on mortgages underlying our portfolio,” Robert E. Cauley, Chairman and Chief Executive Officer of the company, said in a statement. Cauley added that Orchid Island’s portfolio is weighted towards premium coupon pass-through, interest-only, and inverse interest-only residential mortgage-backed securities, which are highly sensitive to prepayment rates. The reduced dividend brings the firm’s pay-out rate more closely in-line with the premium amortization that the financial firm is currently experiencing in its portfolio. Orchid Island has an estimated total return on equity for the quarter ended June 30, 2015 of 0.4%, or 1.6% on an annualized basis. Year-to-date, the stock has declined by 27% and in the past 12 months, the stock has dipped slightly more, by 28%. Shares of Orchid Island Capital experienced another drop in the last two weeks of June as mortgage real estate investment trusts were squeezed.
The reduced dividend for July 2015 coincides with reduced enthusiasm from hedge funds in the first quarter. By the end of the first quarter, a total of six of the hedge funds tracked by Insider Monkey were long in this stock, up 20% from one quarter earlier, which may be read as a bullish sign on its own. However, it should be noted that the total value of their holdings decreased by 12.73% to $4.48 million by the end of March from $5.13 million at the end of December, even though the stock appreciated by 1.46%. This is a clear bearish sign from the hedge fund crowd.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular stock picks in real time since the end of August 2012. These stocks returned 135% since then and outperformed the S&P 500 Index by 80 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment. Plus, we also don’t like paying huge fees.
We also pay attention to insider transactions, to see whether executives inside these companies are confident in their firm’s shares. Director Frank Filipps bought 661 shares on April 6. Director Ava Parker bought 732 shares, also on the same date. President and CEO Robert Cauley bought a total of 3,000 shares in two transactions on March 31.
With all of this in mind, let’s analyze how hedge funds have treated Orchid Island Capital Inc. in the first quarter.
How have hedgies been trading Orchid Island Capital Inc (NYSE:ORC)?
David E. Shaw‘s D.E. Shaw & Co., L.P. had the number one position in Orchid Island Capital Inc (NYSE:ORC) at the end of the first quarter, owning 111,301 shares worth close to $1.5 million, amounting to less than 0.1% of its total 13F portfolio. The second-most bullish hedge fund manager was Jim Simons of Renaissance Technologies, with a $1.4 million position of 104,870 shares. The fund had less than 0.1% of its 13F portfolio invested in the stock as well. Some other peers that were bullish include Israel Englander’s Millennium Management, Michael Platt and William Reeves’ BlueCrest Capital Mgmt., and Peter Muller’s PDT Partners.
As industry-wide interest jumped in the number of funds bullish on the firm, specific money managers were breaking ground themselves. The previously mentioned Millennium Management created the most outsized position in Orchid Island Capital Inc (NYSE:ORC), buying 56,934 shares by March 31. Millennium Management had about $754,000 invested in the company at the end of the quarter. However, since total holdings decreased, there were also some hedge fund managers who sold all of their holdings in Orchid Island Capital Inc in the first quarter. Leading the bearish crowd was John Overdeck and David Siegel’s Two Sigma Advisors, which sold 108,700 shares worth about $1.42 million.
The bad news coming from Orchid Island Capital Inc (NYSE:ORC) as well as the negative sentiment of hedge funds in the first quarter means that twe can’t recommend the stock as a buy at this time.
Disclosure: None
