Two Stocks Heading In Different Directions Following Earnings Reports And The One Hedge Funds Love More

With earnings season gathering pace, shareholders of Monsanto Company (NYSE:MON) were dealt a blow today, as the company’s 2015 fiscal fourth quarter earnings missed Wall Street expectations. As a result, the stock opened 4.8% lower today, but has turned north during the first hour of trading. Constellation Brands, Inc. (NYSE:STZ)‘s shareholders should be in a better mood, as the company’s latest financial figures have surpassed analyst expectations and boosted the stock price, with shares having opened up by 3.2% today. Hedge funds have mixed feelings towards these stocks, with Monsanto having an edge over Constellation Brands.

Analysts were expecting Monsanto Company (NYSE:MON) to announce a loss of $0.02 per share and sales of $2.8 billion, and have been taken aback by the figures from the company’s report: sales of $2.4 billion, down by 10% year-over-year, and a loss of $1.06 per share. Adjusted for one-time gains and costs, the loss per share was just $0.19, an improvement from the loss of $0.31 per share posted a year ago. The bad news does not end there, as Monsanto revealed plans to cut up to 2,600 jobs in the next 18-to-24 months as part of its ongoing cost-reduction program. Its management has also decided to accelerate its $3 billion share buyback program as it pushes for a 20% growth in earnings per share by the end of fiscal 2017.

Monsanto Company (NYSE:MON)’s popularity among the hedge funds that we track significantly increased during the second quarter, as the number of funds holding long positions increased to 64, from 54 at the end of March. Their cumulative positions account for 7.10% of the company’s common stock and were valued at $3.54 billion at the end of June, up by 20% during the quarter. Larry Robbins is a big fan of Monsanto, which was among his top five stock picks heading into the third quarter. During the April-to-June period, Robbins increased his investment in the company by 15% to a little over 11.0 million shares. Fir Tree, founded by  Jeffrey Tannenbaum, is also bullish on the stock, having boosted its stake by 15% to amass 2.28 million shares. Alan Fournier does not share their conviction, though, having cut his holding of Monsanto by 8% to 2.16 million shares, according to Pennant Capital Management’s latest 13F filing.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated ten percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. S&P 500’s 57.6% gain) over the last 36 months (see the details here).

“Our wine and spirits business posted improved margins, strong sales growth for our spirits portfolio and excellent financial results for our Canadian business,” said Rob Sands, Chief Executive Officer of Constellation Brands.

Michael Lowenstein, the manager of Kensico Capital, is the largest shareholder of Constellation Brands, Inc. (NYSE:STZ)’s stock among the hedge funds that we follow. Kensico reported ownership of 6.64 million shares in its latest 13F filing, down by 2% during the quarter. Dan Loeb and Alan Fournier also reduced their investments in the company, leaving their funds with 1.9 million shares, down by 5%, and 2.36 million shares, down by 16%, respectively; perhaps a decision they will regret. In general, hedge fund sentiment towards Constellation Brands, Inc. (NYSE:STZ) dipped slightly during the second quarter. Although the number of funds invested in the company was still at 62 at the end of June, the value of the aggregate positions decreased slightly to $4.13 billion. Their combined holdings account for 18.3% of the company’s outstanding stock.

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