Why Are These Stocks Gaining Ground Today?

In what seems to be paradoxical rally right before the Fed raises interest rates for the first time in seven years, both the S&P 500 and the Dow Jones are 1.1% higher than yesterday’s close. Among the gainers are Yahoo! Inc. (NASDAQ:YHOO), Exxon Mobil Corporation (NYSE:XOM), Regions Financial Corp (NYSE:RF), and Vanguard Natural Resources, LLC (NASDAQ:VNR). Let’s find out why investors are buying.

In addition, let’s analyze hedge fund sentiment toward the stocks, if relevant. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see the details here).

Yahoo! Inc. (NASDAQ:YHOO) is trading 1.87% higher as Alibaba Group Holding Ltd (NYSE:BABA) shares have gained 3% on the day. Since most of Yahoo! Inc. (NASDAQ:YHOO)’s value is in its position in Alibaba, it’s not surprising that the two stocks would be very correlated with each other (with Alibaba leading and Yahoo following). Alibaba shares are higher because investors believe the company’s standing with Beijing has improved after it acquired South China Morning Post, a Hong Kong newspaper that has been critical of the government in the past. Although the editors and writers of the century old media organization will still have independence, the newspaper might be a little less critical of China and help improve China’s image around the English speaking world. Among the funds we follow, 89 reported long positions in Yahoo as of the end of September, down from 104 funds a quarter earlier.

Exxon Mobil Corporation (NYSE:XOM) is leading the oil sector higher as shares of the company are up 3.6% in midday trading. Investors are becoming more optimistic on the stock as WTI and Brent prices try to put in a technical bottom around the $35-$40/barrel area. If crude can rally above $40 per barrel and hold that level or if geopolitical turbulence spreads across the Middle East, many shorts will cover and the price of commodity will rally even further. Many investors, including 61 funds from our database, are bullish on Exxon as the company has the only ‘AAA’ credit rating in the sector and will have more than enough cash flow to cover its dividend yield of 3.7%. Ken Fisher’s Fisher Asset Management owned 5.47 million shares of Exxon at the end of September.

On the next page, we examine Regions Financial Corp, and Vanguard Natural Resources LLC.

Regions Financial Corp (NYSE:RF) shares have advanced by 4% today, alongside most of its peers from the banking industry as the Federal Reserve is widely expected to raise interest rates for the first time since 2007. As a regional bank that makes a substantial amount of profit from lending, Regions Financial Corp (NYSE:RF) will benefit from the rising rates by realizing a wider net interest margin and a higher return on invested capital. Given the strong U.S. economy, Regions’ non-performing loans should remain low, leading to faster book value growth. A total of 35 funds among those we track were long 7.3% of the bank’s outstanding stock at the end of September.

Capping off our list of out-performers is oil E&P Vanguard Natural Resources, LLC (NASDAQ:VNR), whose shares have rallied by 16.5% since yesterday’s close. Investors are buying the stock because WTI prices have headed higher as Washington considers lifting the crude export ban and as some crude shorts take profits before crude contracts near their Great Recession lows. According to our database of around 730 elite funds, three funds owned $2.03 million worth of Vanguard Natural Resources, LLC (NASDAQ:VNR) shares at the end of the third quarter, down from four funds and $3.21 million at the end of the second quarter.

Disclosure: none