WRLD, TROV, MEI: Biggest Losers Of The Day And What Hedge Funds Think About Them

The tumbling shares of three companies from diverse industries caught our attention today and compelled us to take a closer look at what caused their implosion and whether they could represent good buying opportunities for investors. The companies are Methode Electronics Inc. (NYSE:MEI), World Acceptance Corp. (NASDAQ:WRLD), and TrovaGene Inc (NASDAQ:TROV).

Let’s start with Methode Electronics Inc. (NYSE:MEI), which has fared the worst of the unfortunate trio today, with shares diving by 28.33%, undoing what had been a strong year-to-date performance, with shares up by 18% in 2015 as of yesterday’s closing bell. Methode Electronics released its fiscal fourth quarter results for 2015 today, and needless to say, the market did not react well to them. The quarterly results themselves weren’t awful, with earnings being in line with estimates and revenue only slightly beneath; it was the company’s lowered guidance for fiscal year 2016 that did it in; or rather, did its shares in. In particular, earnings were forecast to be between just $2.07 and $2.22 per share for the upcoming fiscal year, down significantly from the $2.57 the company earned from its just completed fiscal year 2015. Revenue guidance was also poor, with even the high end of the guidance falling $16.1 million short of the $881.1 million in revenue the company just posted for 2015.

If we look at hedge fund activity in Methode Electronics Inc. (NYSE:MEI), we do see slightly negative sentiment from some of the best money managers in the world heading into this quarter. Overall fund ownership declined to 23 from 25, and while the value of their investments did increase by 20% to $166 million, shares of Methode were up by 29% during the first quarter, showing that share ownership among funds actually declined as well. Donald Chiboucis’ Columbus Circle Investors was one of the funds to close a position in the stock, a position which was valued at $12.62 million at the end of 2014, while Chuck Royce’s Royce & Associates maintained the largest position in our database, worth $42.73 million as of March 31.

Still, the large drop today appears to be a bit of an overreaction, as the company is still expecting solid compounded EBITDA growth of 9-10% annually over the next five years, suggesting this is only a short-term setback. We give a buy rating to this stock based on its current price.

Next up is World Acceptance Corp. (NASDAQ:WRLD), which plunged 23% primarily due to a downgrade from FBR Capital before the markets opened Thursday. The firm cut the stock’s rating to ‘Market Perform’ from ‘Outperform’, and slashed its price target to $73 from $98. Later in the day, Sterne Agee reiterated its ‘Neutral’ rating, while eliminating its $85 price target on the stock, calling the situation faced by World Acceptance Corp. a challenging one. The market reaction to the downgrade seems to be a bit of an overreaction, as in the case of Methode’s drop, given that Janney Capital initiated coverage on World Acceptance just last week with a ‘Buy’ rating and $100 price target, which only led to a brief 5% spike in shares.

Hedge funds were positive on World Acceptance Corp. (NASDAQ:WRLD) heading into this quarter, with a total of 13 of the hedge funds tracked by Insider Monkey being long in this stock, a change of 18% from the previous quarter. Invested capital meanwhile rose nearly 50% to $56 million from $38 million.

Of the funds tracked by Insider Monkey, Edward Goodnow‘s Goodnow Investment Group had the largest position in World Acceptance Corp. (NASDAQ:WRLD), worth close to $28.2 million. Other hedgies with similar optimism included Peter Muller’s PDT Partners, Nathaniel August’s Mangrove Partners, and Jim Simons‘ Renaissance Technologies.

We also believe this stock makes for a good buying opportunity at its current depressed levels.

Lastly is TrovaGene Inc (NASDAQ:TROV), which fared better than the previous stocks, but nonetheless slumped by more than 12% today. Interestingly, TrovaGene’s dip came despite an analyst (Maxim Group) initiating coverage on the stock with a ‘Buy’ rating this morning. There appears to have been no major catalyst behind the dip, with shares simply trending downward due to bearish sentiment, including a put/call ratio that hit the 1.10 mark as shares of TrovaGene trade at obscene levels from where they began the year, still up by over 110% year-to-date.

That performance has been a major coup for Roberto Mignone’s Bridger Management, as it increased its position in TrovaGene Inc (NASDAQ:TROV) during the first quarter to 2.85 million shares. Just five funds had positions in the stock heading into the second quarter, up from four at the end of 2014, while their invested capital increased to $28 million from $11 million, showing extreme bullishness, even factoring in the stock’s 43% appreciation during the quarter.

Nonetheless, with shares up another 53% in the second quarter, even including the dip today, it’s hard to recommend this stock to anyone. We don’t think the dip today makes for an attractive enough entry point and investors should look elsewhere.

It is well-known that hedge funds have under-performed the S&P 500 based on net returns over the past several years. But we are missing something very important here. Hedge funds generally pull in strong returns from their top small-cap stocks and invest a lot of their resources into analyzing these stocks. They simply don’t take large enough positions in them relative to their portfolios to generate strong overall returns because their large-cap picks underperform the market. We share the top 15 small-cap stocks favored by the best hedge fund managers every quarter and this strategy has managed to outperform the S&P 500 every year since it was launched in August 2012, returning over 142% and beating the market by more than 82 percentage points (read the details). Because of this, we know that collective hedge fund sentiment is extremely telling and valuable.

Disclosure: None