Why Are These Four Stocks Gaining Ground on Tuesday?

The stock market opened in the red on Tuesday amid positive housing starts data, which indicated a 6.5% annual growth to 1.21 million, which is a sign of the strengthening of the U.S economy. However, among the overall decline of the major indices, a number of companies jumped in the first hours of trading on the back of positive news, such as earnings topping estimates. In this article, we will take a closer look at four stocks that are trading higher today and will analyze if there is positive sentiment from the elite hedge funds that we track, which could indicate whether or not today’s gains will be short-lived.

The hedge fund sentiment can predict the long-term potential of a stock, according to our research. According to our backtests that analyzed 13F filings of several hundred hedge funds between 1999 and 2012, the 50 most popular stocks among these funds generated a monthly alpha of six basis points. These stocks mainly included large- and mega-cap stocks and they underperformed the market by seven basis points per month. On the other hand, their 15 most popular small-cap picks generated monthly returns of nearly one percentage point above the market. Based on these results, we developed a strategy that imitates a portfolio of the 15 top small-cap ideas among over 700 select hedge funds and it has returned 102% since it went live in August 2012, beating the S&P 500 ETF (SPY) by some 53 percentage points (see more details here).

With this in mind, let’s take a closer look at today’s gainers, starting with Travelers Companies Inc (NYSE:TRV), which opened 3% higher, but has slightly retracted and is currently trading 1.70% up on the back of its third quarter results. The company showed a 1.3% annual fall in revenue to $6.79 billion, while its profit advanced to $2.97 per share from $2.69 a year earlier. Travelers Companies Inc (NYSE:TRV) delivered an operating profit of $2.93 per share and easily beat the estimates for its performance, which were revenue of $6.11 billion and operating profit of $2.26 per share. Among the hedge funds from our database, Travelers Company witnessed an increase in popularity, with the number of funds with long positions advancing to 43 from 32 during the second quarter. However, even though the total value of their holdings went up to $784.27 million, it still represented only 2.50% of Travelers Companies Inc (NYSE:TRV)’s outstanding stock. Moreover, most top shareholders in our database boosted their stakes between April and June. For example, Cliff Asness’ AQR Capital Management increased its stake by 30% to 2.52 million shares, while Jim Simons’ Renaissance Technologies added 654,600 shares to its position, taking it to 687,672 shares.

Sonic Corporation (NASDAQ:SONC) is another stock that registered an 8% gain on the back of its third quarter results. Yesterday, after the bell, the company announced EPS of $0.43 for the quarter, up from $0.34 a year earlier and above the estimates of $0.42. Smart money has also been overlooking this company so far, since only 24 funds reported owning shares of Sonic Corporation as of the end of June, while in aggregate, their holdings represented 12.40% of its outstanding stock. Nevertheless, among the investors bullish on Sonic Corporation (NASDAQ:SONC), the top two shareholders, Richard Chilton’s Chilton Investment Company and Israel Englander‘s Millennium Management raised their stakes by 28% and 133% respectively during the second quarter, to 2.28 million shares and 1.14 million shares.

On the following page, we will take a look at Yum! Brands, Inc. (NYSE:YUM), which is up on spin-off news and and Team Health Holdings LLC (NYSETMH), which is gaining ground on the back of an acquisition bid.

Yum! Brands, Inc. (NYSE:YUM)‘s shares have advanced by over 4% after the company announced that it plans to spin-off its China business into a publicly-traded company amid pressure from activist investor Keith Meister of Corvex Capital, who last week was appointed to its Board of Directors (see details). The new company will be a franchise of Yum! Brands, Inc. (NYSE:YUM) in Mainland China and will spend a part of its sales as payment to the parent company for exclusive rights to use the KFC, Pizza Hut and Taco Bell brands. The news has definitely pleased hedge funds, who were stockpiling shares of the company during the second quarter. Overall, the number of funds bullish on Yum! Brands, Inc. (NYSE:YUM) advanced to 59 from 45, while the aggregate value of their holdings surged to $4.06 billion from $1.49 billion during the second quarter and represented over 10% of the company’s value. Among them, Corvex Capital increased its stake to 15.29 million shares from 856,500 shares reported a quarter earlier, while another activist, Dan Loeb’s Third Point, inched up its position by 9% to 3.58 million shares (see what Loeb said about the company in his letter to investors for the first quarter).

Finally, Team Health Holdings LLC (NYSE:TMH) has advanced by over 16% so far today. Earlier today, Amsurg Corp (NASDAQ:AMSG) made public its bid to acquire Team Health Holdings LLC (NYSE:TMH) for $71.47 per share, or over $5.0 billion. However, according to The Wall Street Journal, citing people familiar with the matter, Team Holdings rejected the deal made on October 12, which led to AmSurg going public with the matter in order to put more pressure on the company. Among the funds we track, Team Health Holdings LLC (NYSE:TMH) lost some popularity during the second quarter, with the number of funds that owned shares of the company declining by nine to 22, while in aggregate they held 13.50% of the company’s stock at the end of June. Among them, Alan Fournier‘s Pennant Capital Management held the largest stake, containing 3.20 million shares. Moreover, two quant funds, Ken Griffin’s Citadel Investment Group and D. E. Shaw boosted their stakes by 90% and 133% to 501,208 shares and 464,451 shares respectively.

Disclosure: None