In the second quarter, Peter Muller, head of the $2.5 billion quantitative fund PDT, dumped his positions in Advanced Micro Devices, Inc. (NASDAQ:AMD) and Finisar Corporation (NASDAQ:FNSR) and added shares to his current holding of NewLink Genetics Corp (NASDAQ:NLNK) according to 13F forms filed with the SEC. Did Muller make the right decision to sell AMD? Apparently, as shares have lost about 14% of their value in this time frame.
Muller is one of Wall Street’s premier quantitative traders and uses complex algorithmic models to buy and sell stocks, futures and currencies based on statistical correlations and aberrations that are in the market. His peers, including the head of Blackstone’s hedge fund J. Tomilson, praise him saying he is “up there with the best and brightest—bar none.”
PDT was started in 1993 as a trading division of Morgan Stanley until 2011 when it was spun off into its own hedge fund to comply with the laws of Dodd-Frank. PDT’s offices today appear to be a combination of a hedge fund and what you would find in a Silicon Valley start-up. There are Ping-Pong and foosball tables and whiteboards, but everyone comes to work wearing suits. PDT’s mindset towards investing is long-term and they take an academic approach to portfolio change. They understand that their models may not affect returns for two years or more, but they are confident in their algorithms to stick with their investments. PDT has been one of the best performing funds and they are hoping their moves with AMD, Finisar and NewLink Genetics can help them continue that trend.
Advanced Micro Devices, Inc.
In the second quarter, Muller sold off one of the hottest stocks of the year – AMD. Muller sold his entire holding of 4,004,756 shares worth $58,851,000. It has returned 100% in the past year and over 500% since the beginning of 2016.
Muller is betting that AMD’s new product launches of Ryzen 3 and Vega don’t cause AMD’s stock to soar the same way the releases of Ryzen 7 and Ryzen 5 did. Ryzen 3 is a budget CPU (central processing unit) that will give AMD gains in market share. The more market share AMD gets, the more likely re-sellers like Lenovo, Dell and HP will offer Ryzen-based CPUs. Vega, AMD’s high-end GPU (graphics processing unit) that competes with Nvidia is off to a slow start but AMD is still optimistic.
Analysts across the Street are shocked by how quickly AMD has taken market share from Intel with the release of its Ryzen processors. In August, AMD had 56.1% of processors sales, overtaking Intel for the first time in close to a decade. AMD, which initially focused on lower prices, is now entering the high-priced and high-margin market with the release of the Ryzen Threadripper on August 10th.
The Threadripper is a high priced and high-margin part that competes against Intel’s main consumer-product lines. Even though Intel released a new high-performance desktop processor last quarter, interest in the Threadripper dwarfs the interest in Intel’s product.
Analyst’s opinions are mixed when it comes to AMD with the consensus rating being a Moderate Buy. According to TipRanks, 9 out of 20 Wall street analysts in the last three months gave a Buy rating, while 8 gave a Hold rating and 3 gave a Sell rating. The average price target is $14.54, representing an 18.8% upside from current levels.
It seems that PDT sold its holding of Finisar Corporation just in time as the stock tumbled 8% after the fiber-optic company reported first-quarter earnings in line with expectations, but had a disappointing outlook for its second quarter. PDT sold off its entire holding of 278,100 shares worth $7,603,000.
Finisar’s first quarter earnings were in line with expectations with an EPS of $0.40 and revenues of $341.3 million. What sent the stock down was Finisar’s second quarter expectations of an EPS of $0.30 and revenues of $332 million. Analyst’s estimates were an EPS $0.50 with revenues of $372.5 million, much higher than what Finisar forecasted.
According to CEO Jerry Rawls, who announced his retirement on the earnings call, FNSR expects telecom revenues to decline due to “lower demand from our Chinese OEM customers.” There had also been speculation that Finisar could be one of a few companies to supply 3D sensors for Apple’s new iPhones, but the company did not mention any news of 3D sensor production in its earnings outlook which worried investors.
PDT is hoping that it is ahead of the curve in selling Finisar as most analysts in Wall Street are bullish on its future growth. According to TipRanks, 9 out of 10 analysts who have rated Finisar in the last three months gave it a Buy rating, while only one is sidelined. The average price target is $32.48, representing a 57% upside from current levels.
NewLink Genetics Corp
Muller showed that he wasn’t only interested in selling holdings this quarter, when he increased his holding in NewLink by 161%. Muller purchased 115,795 shares valued at $851,000. This was the perfect time to add to his holding as the stock is up close to 100% in the past week after it updated data from its ongoing phase 2 trial of IDO-inhibitor indoximod in advanced melanoma.
The stock is making up the losses it incurred earlier in the summer when NewLink Genetics’ IDO-inhibiting cancer drug pipeline was dealt a serious blow when a mid-stage trail of indoximod in breast cancer patients failed.
This week NLNK received some good news when it released updated data from a trial evaluating the use of indoximod alongside Keytruda, PD-1 checkpoint inhibitor, in advanced melanoma patients. The company hopes that the combination of PD-1 drugs and indoximod can deliver better outcomes for patients. NewLink Genetics believes that IDO-inhibitors prevent cancer cells from stealing proteins that suppress immune system responses and the PD-1 drugs will improve the ability of T-cells to kill cancer cells.
The stock shot up because the most recent study data appears to be in-line with NewLink Genetics’ thinking. The results show a complete response rate of 20% to the treatment of indoximod plus Keytruda therapy, up from 12%. The overall response rate to the approach is 61% and the disease control rate is 80%. While the study shows that adding indoximod to PD-1 therapy can improve the outcomes for advanced melanoma patients, the efficacy and safety of this combination still needs to be confirmed in a phase 3 trial.
The company’s hope is to enroll in a phase 3 trial by the end of 2018, a longer timeline than its competitor Incyte Corp.
Analysts have a strong Buy on NewLink Genetics, with 3 out of 4 analysts in the last three months giving the company a Buy rating, the fourth analyst has a Hold rating. The average price target for the company is $16, representing a 10% downside from current levels.