Are Hedge Funds Losing Interest In LSI Industries, Inc. (LYTS)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded LSI Industries, Inc. (NASDAQ:LYTS) and determine whether the smart money was really smart about this stock.

Is LSI Industries, Inc. (NASDAQ:LYTS) a bargain? Money managers were getting less bullish. The number of bullish hedge fund positions were cut by 3 lately. Our calculations also showed that LYTS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LYTS was in 11 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with LYTS positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Jeffrey Bronchick of Cove Street Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to check out the latest hedge fund action surrounding LSI Industries, Inc. (NASDAQ:LYTS).

How have hedgies been trading LSI Industries, Inc. (NASDAQ:LYTS)?

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LYTS over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of LSI Industries, Inc. (NASDAQ:LYTS), with a stake worth $8.4 million reported as of the end of September. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $4.2 million. Millennium Management, Arrowstreet Capital, and Cove Street Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to LSI Industries, Inc. (NASDAQ:LYTS), around 0.11% of its 13F portfolio. Cove Street Capital is also relatively very bullish on the stock, earmarking 0.11 percent of its 13F equity portfolio to LYTS.

Since LSI Industries, Inc. (NASDAQ:LYTS) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedge funds who sold off their entire stakes heading into Q4. At the top of the heap, Constantinos J. Christofilis’s Archon Capital Management said goodbye to the biggest stake of the 750 funds monitored by Insider Monkey, valued at an estimated $1.8 million in stock. David Nguyen and Nancy Oh’s fund, One68 Global Capital, also said goodbye to its stock, about $0.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to LSI Industries, Inc. (NASDAQ:LYTS). We will take a look at StoneMor Inc. (NYSE:STON), Kura Sushi USA, Inc. (NASDAQ:KRUS), First United Corp (NASDAQ:FUNC), and Ramaco Resources, Inc. (NASDAQ:METC). This group of stocks’ market valuations are similar to LYTS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 4.75 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $16 million in LYTS’s case. Ramaco Resources, Inc. (NASDAQ:METC) is the most popular stock in this table. On the other hand StoneMor Inc. (NYSE:STON) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks LSI Industries, Inc. (NASDAQ:LYTS) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on LYTS as the stock returned 72.6% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Disclosure: None. This article was originally published at Insider Monkey.