Byline Bancorp, Inc. (BY): Hedge Funds In Wait-and-See Mode

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Byline Bancorp, Inc. (NYSE:BY) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Byline Bancorp, Inc. (NYSE:BY) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Verso Corporation (NYSE:VRS), Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX), and United Insurance Holdings Corp. (NASDAQ:UIHC) to gather more data points. Our calculations also showed that BY 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).

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

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Peter Rathjens of Arrowstreet 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. With all of this in mind let’s take a gander at the fresh hedge fund action encompassing Byline Bancorp, Inc. (NYSE:BY).

How have hedgies been trading Byline Bancorp, Inc. (NYSE:BY)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 3 hedge funds with a bullish position in BY a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Mendon Capital Advisors was the largest shareholder of Byline Bancorp, Inc. (NYSE:BY), with a stake worth $4.9 million reported as of the end of September. Trailing Mendon Capital Advisors was Renaissance Technologies, which amassed a stake valued at $3.5 million. Millennium Management, Two Sigma Advisors, and Arrowstreet 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 Mendon Capital Advisors allocated the biggest weight to Byline Bancorp, Inc. (NYSE:BY), around 2.39% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, setting aside 0.32 percent of its 13F equity portfolio to BY.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Weld Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Arrowstreet Capital).

Let’s check out hedge fund activity in other stocks similar to Byline Bancorp, Inc. (NYSE:BY). These stocks are Verso Corporation (NYSE:VRS), Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX), United Insurance Holdings Corp. (NASDAQ:UIHC), and The Pennant Group, Inc. (NASDAQ:PNTG). This group of stocks’ market values resemble BY’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $48 million. That figure was $11 million in BY’s case. Verso Corporation (NYSE:VRS) is the most popular stock in this table. On the other hand The Pennant Group, Inc. (NASDAQ:PNTG) is the least popular one with only 8 bullish hedge fund positions. Byline Bancorp, Inc. (NYSE:BY) is not the least popular stock in this group but hedge fund interest is still below average. 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on BY as the stock returned 26.6% during the second quarter and outperformed the market by an even larger margin.

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