Why Are These Stocks Falling Today?

It’s December 4, and commodity markets are on edge as OPEC meets in Vienna to discuss their production policy in the face of the crude glut. The S&P has also been volatile recently as the Federal Reserve prepares to raise interest rates for the first time in seven years.  Given the state of the markets, it’s not surprising that Whiting Petroleum Corp (NYSE:WLL), Seadrill Ltd (NYSE:SDRL), GoPro Inc (NASDAQ:GPRO), Barnes & Noble, Inc. (NYSE:BKS), and Vale SA (ADR) (NYSE:VALE) are off considerably. Let’s take a closer look at why investors are selling.

In addition, let’s also analyze relevant hedge fund sentiment toward the stocks. 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 environment. 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).

First up are Seadrill Ltd (NYSE:SDRL) and Whiting Petroleum Corp (NYSE:WLL), which are down by 5% and 8%, respectively, after OPEC decided to raise its production output ceiling to 31.5 million barrels per day from the previous 30 million barrels per day. OPEC’s raise affirms Saudi Arabia’s goal of keeping crude prices low long enough to drive weaker marginal supply off the market. The low Brent prices have certainly taken their toll on Seadrill Ltd (NYSE:SDRL), whose stock price has declined by over half this year alone. Whiting Petroleum Corp (NYSE:WLL) hasn’t done any better, with its stock down 52% year-to-date. Both companies have liquidity, but need crude prices to rise in order to be cash flow positive and profitable. According to our database of around 730 elite funds, 42 funds were long Whiting Petroleum and 23 funds were long Seadrill at the end of September.

On the next page, we examine why Vale, Barnes & Noble, and GoPro are off.

Next up is Vale SA (ADR) (NYSE:VALE), whose stock has retraced 4% on the day as spot iron ore prices hit fresh 10-year lows due to declining Chinese Steel demand. Due to the oversupply situation in the market, iron ore spot prices trade for under $40 per metric ton, 66% below what they were a few years ago. Vale is a major iron ore producer and needs commodity prices to pick up in order to produce the profits investors expect from it. Brazil’s macroeconomic situation is also weighing on Vale, as the country suffers its worst economic crisis since the 1930’s. A weak Brazilian economy translates to a weak real, which lowers Vale’s cash flow metrics in dollar terms. A total of 24 funds from our database owned $140.9 million worth of Vale SA (ADR) (NYSE:VALE)’s stock at the end of the third quarter.

Barnes & Noble, Inc. (NYSE:BKS) can’t seem to catch a break as its stock continues to decline. After falling almost 5% on Thursday, Barnes & Noble, Inc. (NYSE:BKS) shares are down by another 21% today after the company reported a second quarter loss of $0.36 per share on revenue of $894.65 million, missing estimates by $0.05 per share and $23.18 million, respectively. Comparable-store sales declined by 3% year-over-year, while NOOK sales dropped by 31.9% year-over-year to $43.5 million due to lower content sales.

Last but not least, GoPro Inc (NASDAQ:GPRO) is off 3% after the analysts at RW Baird downgraded the stock to ‘Neutral’ from ‘Outperform’ and lowered the price target to $18 from $36. The analysts cited the lack of a near-term catalyst, and the lack of a meaningful pickup in sales as reasons for the downgrade. GoPro shares have certainly fallen on hard times as shares are down over 70% year-to-date. While the commodity product pricing pressure thesis is playing out just as the bears warned, the number of smart money investors in the stock inched up to 25 in the third quarter from 21 in the second quarter as the stock trades near value territory levels.

Disclosure: None