Why Are These Hot Stocks Surging?

Shares of Canadian Solar Inc. (NASDAQ:CSIQ), Yelp Inc (NYSE:YELP), Skechers USA Inc (NYSE:SKX), Piedmont Natural Gas Company, Inc. (NYSE:PNY), and Eros International plc (NYSE:EROS) are surging today for various reasons. Let’s take a closer look at the upside catalysts driving these stock higher and examine relevant hedge fund sentiment towards each of them.

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 small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

Canadian Solar Inc. (NASDAQ:CSIQ) has surged by 7.21% after the solar company upped its third quarter guidance due to better than expected solar demand. The alternative energy company now expects third quarter module shipments to be 1.18 GW-to-1.23 GW, up from the previous guidance of 970 MW-to-1.02 GW, which gross margin are also expected to be at or above the high end of the previous 12%-to-14% guidance range. The company also expects third quarter revenue to be $805 million-to-$815 million, versus analyst expectations of $616.1 million, in part because of the sale of a solar project in California. Shares of the solar company are down by 8.19% year-to-date as correlations to low crude prices and a weak Chinese stock market weigh on investor sentiment. Given solar’s secular rise, the long-term picture still looks good for the company. Of the 730 elite funds we track, 32 of them owned $243.95 million worth of the company’s shares, accounting for 15.40% of the float on June 30,

Yelp Inc (NYSE:YELP) is up by 8.11% after PC Magazine reported that Amazon.com, Inc. (NASDAQ:AMZN) is integrating Yelp reviews and search results into its Echo product. Echo is Amazon’s smartphone-less personal assistant. Given Amazon has hundreds of millions of customers, investors hope Amazon will integrate Yelp reviews into Amazon search one day too. Traders could also be buying Yelp because the company is expected to report earnings on October 28. With a market capitalization of $1.85 billion, Yelp is bite-sized for many bigger investors. 44 funds reported stakes worth $1.07 billion (representing 33.40% of its float) as of the end of June, versus 29 funds with $490.87 million in shares at the end of March.

On the next page, we examine why Skechers, Eros, and Piedmont Natural Gas are surging.

Skechers USA Inc (NYSE:SKX) is up by 4.6% after falling more than 30% on Friday. Skechers’ stock fell because its third quarter revenues missed expectations by $20.36 million and its inventories rose by 38% year-over-year. Investors expected a big top and bottom line beat given the stock’s huge year-to-date rally up to that point. The selling may be a little overdone, however, as management noted that inventory buildup was consistent with fourth quarter orders. Given the forward P/E of 14.79, Skechers isn’t expensive, although the stock could take some time to consolidate its gains for a few quarters.

Eros International plc (NYSE:EROS), a leading company in the Indian film entertainment industry, is up by 10.5% in morning trade as the stock remains volatile after Wells Fargo analyst Eric Katz said, “we still don’t know the largest content buyers driving this increase, and we aren’t fully comfortable with the fact nearly half of the revenue originates outside of India”. India is a huge growth market and its GDP per capita will rise much faster than developed countries’ GDP per capita will, but investors need to be able to verify all the numbers before the stock can rally back to its levels from earlier in the year.

Piedmont Natural Gas Company, Inc. (NYSE:PNY) is up by a stunning 38.39% after Duke Energy Corp (NYSE:DUK) announced that it will buy Piedmont for $60 in cash for every share of Piedmont stock. The deal, which includes $1.8 billion in Piedmont Natural Gas’ existing net debt, will cost Duke Energy approximately $6.7 billion and should close by the end of 2016. Eight funds that we track owned $22.15 million of Piedmont’s shares (representing just 0.80% of the float) on June 30. Among the lucky hedge fund holders was Joel Greenblatt‘s Gotham Asset Management which owned 157,969 shares at the end of June.

Disclosure: None