Here's why hedge funds are getting creamed

Activists seem to be lurking everywhere, and boards of directors are listening to them. It's all part of an unexpected 2014 landscape that's making the market tough for negativists.

By Jim Cramer Mar 12, 2014 12:08PM

Downward arrow across a broken dollar sign © jackhickling/Getty ImagesIf you were to ask a short seller what the most dangerous words in the lexicon are right now, he might say: "Our company is actively looking at ways to optimize our capital structure."


Those were the words that Pete Bensen, the chief financial officer of McDonald's (MCD), uttered Tuesday, and they drove a spike through the heart of anyone who was betting that numbers were simply way too high for the company and had to be slashed.


TheStreet.com logoFor the longest time, companies just took it. They took the beating that came from disappointing performance. So same-store sales are down? That means estimates are too high. Estimates coming down? The stock gets hammered. So if you can predict who is going to disappoint for the quarter, then you can short the stock, then cover when it disappoints and numbers come down and the owners turn into sellers.


It really was that simple.


But now look at the landscape, just in restaurants. Wendy's (WEN) screws up repeatedly, and the next thing you know Nelson Peltz gets involved and a new CEO gets appointed who is smarter and more shareholder-friendly. The shorts get crushed.


Darden (DRI) blows up repeatedly, missing estimates quarter after quarter. The stock becomes annuity for the short sellers, as you just need to short the common stock ahead of any report on how poorly Red Lobster was doing. The numbers get cut, the stock gets hammered, and you cover into the weakness.


Then, suddenly, not one but two activists surface. The next thing you know, the worse the news, the more likely something positive will occur, be it a change at the top or a genuine restructuring that brings out value -- not the inane spinoff of Red Lobster on an unsuspecting public.


Now McDonald's, after four straight months of disappointing numbers, comes out and says it might do something creative -- not with same-store sales, mind you, but with its balance sheet -- and the stock has its biggest rally in two years.


After all, the company is underleveraged, and it does have a lot of financial flexibility. Why can't it announce an even bigger share-buyback program or put through an immense dividend increase? Why doesn't it just close all the underperformers and shrink to grow? Or the company could split up the way Altria (MO) did, into a domestic entity that pays an absurdly high dividend with slow growth and a much faster-growing international business. Investors would love that.


But the short sellers won't. Which is what makes this market so difficult for the negativists. Activists seem to be lurking everywhere. Boards are listening to activists. Outsiders are demanding changes, and they are getting them. CEOs get fired for missing numbers, and balance sheets get leveraged to boost stock prices.


It's all part of the 2014 landscape, and this phenomenon has been so unexpected that a now serially underperforming McDonald's has become the best-performing stock in the Dow only a few days after it reported incredibly disappointing monthly numbers.


Short, miss the quarter, cut numbers, cover? No more. Now it's "Get long, quarter's missed, and action gets taken." No wonder hedge funds are doing so badly!


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Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio and uncover the stocks Cramer thinks could be winners.





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43Comments
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Seems like McDonalds is finally in the terrible trouble it start years ago by having it's stores remodel or rebuild very 5 years or so. The debt load of those remodels is now weighing heavy on McDonald balance sheets as they try to dig out from under the remodels.

Just like the US is doing silly things. Why does Obama care about securing the Ukrainian border when he refuses to secure the US border with Mexico??? Why should we spend billions of dollars securing Ukraine's borders when it is obvious we do not know how to do it.

Mar 12, 2014 1:44PM
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Anybody want to bet that all Obama is doing is political posturing with this overtime nonsense.  Nothing he ever suggests comes to fruition.  Nothing.  I think a good bet is to bet the exact opposite of what he says he will do is actually the end result.  Tell me if you were thinking of buying a used car form this POTUS and he told you it was never in a flood or accident what is the first thought that would pop into your head?  I rest my case.
Mar 12, 2014 12:21PM
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Fast food and restaurants are a dime a dozen and have overpriced their products. 
Mar 12, 2014 1:36PM
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 "No more. Now it's "Get long, quarter's missed, and action gets taken."

 

Pretty good story but he is generalizing quite a bit. I think you will still see companies react both ways. JMHO 

Mar 12, 2014 1:15PM
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Then admittedly Jim it is all a confidence game.  Now the FED is playing the blame game.  Now instead of it being Bushs' fault it is the weather.  Any way shape or form to kick the can (reality) or push off the inevitable is now the newest form of modus operandi.  Like I have said here many times Jon Chambers was one of the first and best at massaging reality to the point you had to ask yourself is this reality or not.  And the beat goes on.  From the White House to Wall Street those that can massage reality into smaller more acceptable little tidbits are handsomely rewarded.
Mar 12, 2014 4:44PM
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Tomorrow bobo will write some sort of defence for herbalife ....
Mar 12, 2014 12:13PM
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Many of the hedge funds that are getting creamed are trying to fight the fed - a terrible idea.
Mar 12, 2014 2:54PM
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Fatty's Library card must have got renewed...??

               Arf, arf, arf....

Mar 12, 2014 3:48PM
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IMHO hedge funds should take a beating! American based and managed hedge funds betting against the success of American companies, the hedge funds might as well be a Russian or Chinese. In 2007 - 2009 when  our entire economy was in the crapper they still made LOTS of money, like leaches or ticks sucking every drop out of a dying body.

 

Hopefully this will be a wakeup call to the 1% that you can't base the entire economy on stocks and trading, you have to base it on goods and services. In a goods and services economy the value of the stock increases as a result of the business doing well, which is the natural order of things in a free market. In our current economy the markets are manipulated by the 1% for the benefit of the 1%, at the expense of the 99%. Loosing money? share prices go up - making money? share prices go up, sell the company? share prices go up. Whatever it takes to make the share prices go up, so the 1% can keep raking it in.

 

A good example, Sears Holdings. Sears hasn't shown a profit on the retail side for forever, closing stores, deferring maintenance, laying off people, reducing inventory (so others have less work supplying them), and selling the all the parts of the company with any value. But it's all good because that moron hedge fund manager and his 1% buddies are making money by selling parts of the company and the net profit gets distributed among the shareholders, with mister hedge fund first in line. On the Sopranos they call it a bust out.

 

Sooner or later there's nothing left. and I believe our economy is getting to that point. The Wall St. crowd are sucking so much money out of our economy there's hardly anything left for the rest of us. Bad business, if you want to make more money create more consumers - not with advertizing, with jobs and decent wages.

Mar 12, 2014 12:41PM
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Of course companies need to take action when they're going downhill. But actions like leveraging up are like greasing the wheels on the little red wagon as it races down. More debt just makes the company more fragile in the next downturn. Yes, it increases ROE, but that's just math. It does nothing for ROI and certainly doesn't make a better company. Buying back stock is good, but not if they just borrow more to do it.

Mar 12, 2014 12:54PM
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a few days ago Bobo Numnutz was criticising those that intimated that the market was nearing a top.

Today on CNBC he actually used the word "toppy" ....really this fool has now predicted pretty much everything..... except perhaps aliens landing in times square and nailing barry the burro bride while singing hava negila ....

:) 
Mar 12, 2014 2:40PM
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DIE BANK OF AMERICA DIE ! (JFD)  !!
Mar 12, 2014 12:35PM
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havasu46: I agree with you.Whenever somebody mentions raising the minimum wage look how

people complain"My dollar food menu prices will go up"The hardest jobs I had years ago paid

minimum wage.I bet those that complain about the dollar food menu going up have big,fat

bellies.

Mar 12, 2014 1:56PM
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JimCramer should feel sorry for CEO`s that get fired.Their golden parachute is worth like

$200,000,000 for screwing up.Always buy quality companies.I`ll own JNJ and BRK until I

die.

Mar 12, 2014 1:01PM
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Yup took a Fatty, and then flushed it down the drain...
Mar 12, 2014 1:34PM
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Manipulators selling on any and every rally attempted; they are in control and outnumber us all down here...Still 2 and a half hours to go and things are still looking bleak....Cheaters having a very good week and we still have 2 more days to go....Be cautious...More later.
Mar 12, 2014 12:44PM
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I'm worried! Carl Icahn is hinting he plans to launch a takeover of my string of Chalupa Parlors!

Oh the horror of those greedy Wall Street guys. I'd bet the Fed put him up to it!

Yuk yuk!
Mar 12, 2014 12:59PM
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He didn't pitch his book, hotel or restaurant today ....must have been a ghost writer .....
Mar 12, 2014 12:30PM
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Do not fall for it folks, what we are having now is just another sucker's rally....Scumbags in complete control, we should be all in the red at anytime now...Do not trust these trash as far as we can throw them....Lets hope this afternoon the good guys can make something positive happen.
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