Three Stocks Register Large Gains Today but Hedge Fund Data Suggest You Should Ignore the Hype

The trading session on Wednesday morning was marked by a slight decline of the major indices, but a number of stocks registered significant gains, such as the small-cap Abengoa SA (ADR) (NASDAQ:ABGB), which jumped by over 25% following news that the Spanish energy company is close to reaching an agreement with creditors that would involve a capital raise of around $725 million (650 million euro). In this article we will take a closer look at the developments that sparked the increase of Abengoa and two other stocks, namely Signal Genetics Inc (NASDAQ:SGNL) and First Niagara Financial Group Inc. (NASDAQ:FNFG) and will see whether the hedge fund sentiment towards them suggests that other investors should follow the hype.

At Insider Monkey we compile the data after the end of each round of 13F filings in order to assess the popularity of several thousand stocks among a pool of over 700 best-skilled hedge funds. The reason we do that is because in this way we can benefit from the outstanding stock-picking skills of these investors, which we can emulate in a certain way. However, contrary to the general opinion, hedge funds most popular picks are not very useful to imitate, because our research that covered the period between 1999 and 2012 suggested that these stocks slightly lagged the performance of the S&P 500 Total Return Index. On the other hand, hedge funds’ top small-cap picks managed to beat the benchmark by nearly one percentage point per month on average, because these companies often hide some intrinsic value and can be explored for more fruitful returns. Our strategy involves imitating a portfolio of 15 most popular small-caps among hedge funds and it has returned 118% since August 2012, beating the S&P 500 ETF (SPY) by some 60 percentage points (see more details here).

In this way, Abengoa SA (ADR) (NASDAQ:ABGB), which, despite today’s gains, is still down by over 50% year-to-date, has remained outside the area of interest of most hedge funds. According to Reuters, the company has secured the support of Banks Santander, HSBC and Credit Agricole to raise more capital and other banks are also expected to join the deal. The company will issue new shares at a lower price and will overhaul its corporate structure, which was approved by its largest shareholders. Abengoa SA (ADR) (NASDAQ:ABGB) also intends to call a meeting of shareholders to ask their opinion regarding the new plan. However, among the funds we track, only two held long positions in Abengoa SA (ADR) (NASDAQ:ABGB) with a total value of around $1.09 million at the end of June, including Jim Simons‘ Renaissance Technologies, which disclosed ownership of 55,900 shares worth $888,000 in its latest 13F. In addition, Daniel S. Och’s OZ Management reported a $15.67 million position that contains warrants underlying 15.80 million shares of Abengoa.

The nano-cap healthcare company Signal Genetics Inc (NASDAQ:SGNL), saw its stock open higher in double-digits, but has retracted to around 9% in green later. The growth came on the back of the announcement of a new Master Service Agreement with a “leading biopharmaceutical company” that will allow Signal to deploy its MyPRS test to “inform the clinical stage development program of a novel treatment” (the company provides diagnostic services for physicians involved in the treatment of cancer patients). However, the impact that the new agreement will have on Signal Genetics Inc (NASDAQ:SGNL)’s financials is not clear and so far investors have not been very keen on the stock that has slumped by over 40% since the beginning of 2015. The company was included in the equity portfolios of none of the funds from our database, so it has yet to convince investors regarding its profitability (so far, its loss per share increased to $3.50 last year from $0.88 a year earlier).

The last, but not the least is First Niagara Financial Group Inc. (NASDAQ:FNFG), which has advanced by over 12% so far today on the back of reports that it is exploring its sale and has hired JPMorgan to advise it on a possible transaction. The deal will most likely please the company’s shareholders, some of which have probably foreseen this development as they boosted their positions in the company considerably during the second quarter. Among the three companies discussed today, First Niagara Financial Group Inc. (NASDAQ:FNFG) is the most popular among hedge funds we track, being included in the equity portfolios of 25 of them, which amassed stakes worth $147.60 million, up from $102.78 million held in aggregate by 20 funds at the end of June, although the positions amassed less than 5% of the company at the end of June and the holdings of most investors represent small portions of their equity portfolios. Among these investors, Israel Englander‘s Millennium Management leads the bullish crowd as the fund boosted its stake in First Niagara Financial Group Inc. (NASDAQ:FNFG) by over 50% to 7.65 million shares during the second quarter. Billionaire Englander also has exposure to First Niagara through Millennium’s subsidiary Decade Capital Management, which owns 931,800 shares as of the end of June, up by 14% on the quarter. The second-largest shareholder (after Millennium) is David Dreman’s Dreman Value Management, which initiated a stake of 1.51 million shares between April and June.

Disclosure: none