Why Are These Four Stocks Trending Right Now?

Shares of Allstate Corp (NYSE:ALL), American International Group Inc (NYSE:AIG), Fitbit Inc. (NYSE:FIT), and Pioneer Natural Resources (NYSE:PXD) are trending after each company reported earnings yesterday. Given that earnings reports are one of the best indicators of the future direction of stocks, let’s take a closer look at the results of each company and analyze what hedge funds think of them.

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Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

Allstate Corp (NYSE:ALL) shares are up slightly after the insurance company reported third quarter earnings of $1.52 per share on revenues of $7.65 billion, beating estimates by $0.21 per share and $20 million, respectively. Allstate’s property-liability combined ratio was 93.6 in the third quarter of 2015, up by 0.1 from its ratio for the third quarter of 2014, while book value per diluted common share was $47.54, down by 1.5% year-over-year. Shares are still down by 10% year-to-date, but should rise as normalizing interest rates increase Allstate’s return on capital. Cliff Asness‘ AQR Capital Management owned 4.41 million Allstate shares at the end of June.

American International Group Inc (NYSE:AIG) is down by 4.72% this morning after the insurance giant reported earnings of $0.52 per share, versus expectations of $1.03 per share. AIG’s earnings were considerably lower than expectations because management took a $274 million pre-tax restructuring charge and marked down the value of some assets in China. Despite the poor earnings report, the bull case for AIG hasn’t changed, as the company trades at 0.81-times book value. Rising interest rates and a possible mortgage insurance segment spinoff could narrow the gap between AIG’s stock price and its book value. Whether a mortgage insurance spinoff is enough to appease Carl Icahn of Icahn Capital LP, who wants AIG to split into three different companies to avoid the government’s systemically important financial institution (SIFI) designation, is another question. Billionaire Leon Cooperman‘s Omega Advisors is also long AIG, it being Omega’s fifth-largest holding as of October 16.

On the next page, we analyze Fitbit and Pioneer Natural Resources’ earnings reports.

Shares of Fitbit Inc. (NYSE:FIT) are trending after the fitness technology company reported third quarter earnings of $0.24 per share on revenues of $409.3 million, up by 168% year-over-year. The results beat analyst estimates by $0.14 per share in earnings and $58.3 million in revenues. Guidance was also optimistic, with management expecting fourth quarter EPS of $0.20-to-$0.25 and revenues of $620 million-to-$650 million, versus expectations of $0.20 per share and $580.7 million in revenues. Gross margin for the quarter declined by 5.6 percentage points year-over-year to 48.3%, but rose by 1.3 percentage points sequentially. Shares of Fitbit are down by 5.22% in morning trading despite the solid quarter because the company announced it is planning a 21 million stock offering. Shares of Fitbit will likely remain very volatile ahead of the company’s December 15 lockup expiration.

Hedge funds we track seem to be underweight Fitbit Inc. (NYSE:FIT). Of the 730 elite funds we track, 27 owned Fitbit shares worth $249.92 million, representing just 3.20% of the float at the end of June. This compares to the 33.9% of the float that is short. John Griffin‘s Blue Ridge Capital owns 3.5 million shares, while Chase Coleman’s Tiger Global Management LLC owns 500,000 shares. Daniel Benton’s Andor Capital Management owns 350,000 shares.

Pioneer Natural Resources (NYSE:PXD) is trending after the leading independent reported a third quarter loss of $0.01 per share on revenues of $883 million, beating estimates by $0.02 per share and $98 million, respectively. Production rose by 7% quarter-over-quarter to 211,000 barrels of oil equivalent per day, exceeding management’s previous guidance of 205,000-to-210,000 BOE/day. Because of the strong quarterly results, management is raising the company’s full year production growth target to 11% year-over-year from the previous 10% year-over-year target. Seth Klarman’s Baupost Group owned 4.07 million Pioneer shares at the end of June. Andreas Halvorsen‘s Viking Global and Zach Schreiber’s Point State Capital also own shares of the leading independent. Shares of Pioneer should do well once WTI begins heading north again.

Disclosure: None