Market Expectations for the Pershing Square’s Holdings
On November 1st, the billion hedge fund manager and activist investor Bill Ackman blasted ADP as “very inefficient” compared with their major competitor Paychex and said that “its margins are half of Paychex’s” and that if the company doesn’t continue to innovate and become efficient it is going to lose a “significant market share”. Ackman also said that ADP has "missed the boat on technology” describing the ADP’s CTO as a business guy instead of a “technologist”. The management strongly rejected “the false and reckless claims made by Pershing Square” and urged shareholders to vote on their own best interests. The board goes to a vote next week while the stock is up 11% (YTD). Meanwhile here are the earnings expectations for the Pershing Square holdings reported in their latest 13F filings.
Hedge Funds Opinion on SPY, BND and HYG
As the US Stock Indexes are breaking record high levels, some investors are becoming more and more concerned about the current market valuations. Is the market overvalued or undervalued? The Top 30 US Companies (DJIA) are expected to report average earnings growth of -1.78% this quarter and 8.67% (YoY) in the next fiscal quarter and they are currently trading with an average P/E ratio of 18 times earnings. The inflation rate is relatively stable (1.90%) and the interest rates are gradually recovering (1.25%). Also, the unemployment rate looks quite good if you compare it to that of the EU, and some other emerging economies (4.40%). On the other side, the announced tax cuts, Banks Deregulation and the Infrastructure Spending Program by the President Trump’s Administration, adds an additional optimism about the future market returns since the election’s results in November last year.
The Hedge Fund manager Leon Cooperman (Omega Advisors CEO) on August 7 this year, stated that he thinks that the market is “fully valued but it is not overvalued” and that “there is optimism for sure” still prevailing on the market (Video, CNBC). The results of our most recent research showed very similar results. We analyzed the exposure of the financial companies that reported their quarterly 13-F Fillings for the second quarter this year on SPY, HYG and BND.
From the selected 100 financial companies within the range of 20%-100% portfolio exposure to the most popular ETF market index S&P 500 (SPY), 65% of them were bullish. They were holding Call options or shares in the exchange traded fund. However, 35% of the financial companies are still hedging or betting against the market (Put options), with a quite significant exposure on the Equities.
Along with the bullish sentiment on Equities (and despite the rising Interest Rates), all of the the selected 100 financial companies with exposure from 1.97% to 51% of their portfolios on the Vanguard Total Bond Market (BND), were Bullish. This shows that, the investors are still very cautious about the current economic situation and they are hedging their long positions on Equities with also long positions on the Total Bond Market.
We also checked the exposure on the High Yield Corporate Bonds (HYG). This asset class is a very interesting one, as a lot of prominent investors (such as Carl Icahn) are worried that we are already in a “High Yield Bond Bubble” (Video,Bloomberg). However, the results of the research showed quite impressive bullish conviction among the financial companies in the last quarter. From the selected 100 Fillers with highest exposure on the HYG, 81% were Bullish and 19% of them were Bearish. In other words, the selected companies are not believing that the Icahn’s worst fears would become a reality in the near future.
As you can see, the financial sector was quite convinced that we are going to see positive but not very high market returns for the current quarter and the situation will be probably similar in the next. Nevertheless, there is still significant risks that the investors should be aware:
Paylocity Holding Corporation (PCTY)
A 2.5 billion technology company focused on building software solutions for medium-sized organizations in the US. The company offers cloud-based payroll processing and human capital management software solutions. One week ago, the management announced Toby Williams as new CFO, who will be responsible for all the company’s accounting, finance and security efforts, beginning from September 18, 2017.
Paylocity Holding’s stock reached 58.82% gain this month, outperforming the Dow Jones 30 Industrial Average by 45% (YTD). Wall Street is expecting 24.30% revenue with 57.14% earnings growth (YoY) for the current fiscal quarter.
National Beverage Corp. (FIZZ)
One of the most profitable companies in the Beverages-Soft Drinks Industry, FIZZ is releasing its financial results for the second fiscal quarter today, after market close. The stock is outperforming the DJIA by 129% (YTD) and significantly exceeded analysts mean target price of $57.50 per share by 113%. National Beverage’s stock was Reiterated by Maxim Group to Sell Signal (40$ per share) on September 08, but still the Short Float Interest is on Medium Level at 16.34%. The market is expecting 17.60% revenue and 32.08% earnings growth (YoY).
Lakeland Industries, Inc. (LAKE)
Manufacturers and sellers of safety garments and accessories for the protective clothing market, Lakeland Industries are also reporting their quarterly results today (AMC) and will conduct a conference call at 4:30 p.m. EST. The company also announced a “Singular Research Midwestern Values 2017 Conference”, which will take place on September-20-2017 at the W Hotel, Chicago (10:00 am, CET). Their stock is up 32.69% YTD, and the analysts’ mean Target Price is 25% above the current market price. However, Wall Street is expecting zero growth of the company’s earnings per share for the current quarter and a decline by -9.52% (YoY) for the next fiscal quarter. As a result, investors would be extremely interested about the management’s future plans, which could be presented on the upcoming conferences this month.
Is AAOI a short-selling opportunity?
Applied Optoelectronics is a billion technology company focused on design, manufacturing and commercialization of fiber-optic networking products. It targets segments like the internet data centers, cable televisions and fiber to the home networking. It is founded in 1997 in Sugar Land, Texas.
AAOI was among the most favorite small-cap growth stocks this year, drastically outperforming the market in July and at the beginning of August, before it was sued for false and misleading statements and failure to disclose significant information about the loss of major customer’s business. As a result, the stock dropped more than 30% in a week, reaching its June’s lows of $60 per share at the end of this month.
However, Applied Optoelectronics still has very strong fundamentals. Its current profit margin, debt to equity and return on investment are looking extremely good. Recently the company announced the development of “50 Gbps Electro-absorption Modulated Lasers (EMLs)“, which according to the AOI’s VP Jun Zheng will be ideal cost-effective offer of transceivers for long transmission distances. The financial analysts estimates are 59% revenue and 244% earnings growth (YoY) for the current quarter with no revisions in August.
AAOI was downgraded on August 4 by Northland Capital from Outperform to Market Perform ($43 per share). But still, the mean analyst target price is $85.67 per share, which is 30% above the current market price. However, the biggest challenge for the company lies in the potential effect from the ongoing lawsuit. Lundin Law PC publicly encourages investors with losses to contact the firm and participate in the class action lawsuit against Applied Optoelectronics. The current short interest is 57%, even after more than 30% drop this month.
Which Growth Stocks Hedge Funds bought last quarter?
In the analysis that was made by the WSF team yesterday, the holdings of Top 10 growth focused Hedge Funds and Asset Management companies were scanned:
Atika Capital Management
Altimeter Capital Management
Fox Point Capital
Eastbay Asset Management
The selected companies are the hedge fund’s Top 5 Buys from the previous quarter, reported in their quarterly 13F filings. The team only selected the companies with above 25% expected earnings growth and created a list of 10 companies with average expected EPS growth of 46.78% for the current and 61.69% for the next fiscal quarter (YoY). Their average expected growth is exceeding the Dow Jones 30 expected earnings growth of 1.52% for the current and 8.91% for the next quarter of 2017.
The financial analysts’ at Wall Street are expecting highest growth for the Chinese company: Ctrip.com International, Ltd (ticker: CTRP). Cript.com is a 27 Billion Service company that provides travel service for accommodation reservation, corporate travel management, transportation ticketing and packaged tours in China. Billionare hedge fund manager Stanley Druckenmiller, among the other prominent investors, recently reported increased position of 500,000 shares or 1,41 million share stake in the company. Investors are expecting 217.65% earnings growth for the current and 3,700.00% for the next fiscal quarter. The company’s stock is currently trading at NASDAQ with a P/E ratio of 954.18 and PEG ratio of 167 times. Cript.com also has a very strong trend of beating previous analysts’ forecasts, which gives the investors an additional optimism about the outcome of the current fiscal quarter (the results should be released on August 30 AMC). The analysts’ mean target price is $62.47, which is 19.75% above the current market price of $52 per share.
Netflix (NFLX) and Zynga (ZNGA) were also very interesting companies from earnings growth perspective to the selected hedge funds. The investors are expecting Netflix’s earnings to grow 166% and Zynga’s 100% this quarter. They will pay a great deal of attention to the subscriber growth on Netflix as always and will focus more on the competitive strengths of Zynga, as the company struggles to create new hit games on the market.
You may also want to add Wynn Resorts (WYNN), Sociedad Quimica y Minera de Chile (SQM) and Interactive Brokers (IBKR) to your Watchlist, as the hedge funds analysts’ are expecting their earnings to grow above 100% for the next fiscal quarter. Their growth rates are significantly exceeding the averages of the rest of the companies and Dow Jones 30 current average estimates.
The focus for these companies besides the earnings growth will be the current state of the construction projects of Wynn Resorts (WYNN), from which investors are expecting graduate but significant increase of revenues in the future when the projects are completed.
The lithium demand for building the lithium-ion batteries used by the electric cars will be crucial for Sociedad Quimica (SQM). The recent US Geological Survey showed data that the lithium-producing countries are more likely to meet that growing demand in the future. Currently the lithium-mining sector shows no signs of weakness and the investors estimates are that it will continue to grow with a steady rate in the near future.
The last Big Thing coming out of Interactive Brokers (IBKR) shocked the big commercial banks. The company started to offer market access and trading tools to individual investors that were only available to the institutional investors before. Their individual clients from now on will be able to borrow, earn, spend and invest worldwide from one account via the new Interactive Brokers Debit Mastercard. Investors may want to know more about the future of those services, and their impact on the company’s financial results.
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