Did Hedge Funds Drop The Ball On Benchmark Electronics, Inc. (BHE)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Benchmark Electronics, Inc. (NYSE:BHE).

Is Benchmark Electronics, Inc. (NYSE:BHE) a buy right now? Prominent investors are in a bearish mood. The number of long hedge fund positions retreated by 7 recently. Our calculations also showed that BHE isn’t among the 30 most popular stocks among hedge funds (see the video below).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the latest hedge fund action surrounding Benchmark Electronics, Inc. (NYSE:BHE).

How have hedgies been trading Benchmark Electronics, Inc. (NYSE:BHE)?

Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -37% from the first quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in BHE a year ago. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

The largest stake in Benchmark Electronics, Inc. (NYSE:BHE) was held by D E Shaw, which reported holding $12.8 million worth of stock at the end of March. It was followed by Renaissance Technologies with a $12.2 million position. Other investors bullish on the company included Royce & Associates, Two Sigma Advisors, and Millennium Management.

Since Benchmark Electronics, Inc. (NYSE:BHE) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there exists a select few hedge funds that slashed their entire stakes heading into Q3. Intriguingly, Glenn W. Welling’s Engaged Capital sold off the biggest position of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $9 million in stock. Andrew Feldstein and Stephen Siderow’s fund, Blue Mountain Capital, also cut its stock, about $0.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 7 funds heading into Q3.

Let’s check out hedge fund activity in other stocks similar to Benchmark Electronics, Inc. (NYSE:BHE). We will take a look at RPT Realty (NYSE:RPT), Alder Biopharmaceuticals Inc (NASDAQ:ALDR), Stewart Information Services Corp (NYSE:STC), and Despegar.com, Corp. (NYSE:DESP). All of these stocks’ market caps resemble BHE’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $156 million. That figure was $41 million in BHE’s case. Alder Biopharmaceuticals Inc (NASDAQ:ALDR) is the most popular stock in this table. On the other hand RPT Realty (NYSE:RPT) is the least popular one with only 9 bullish hedge fund positions. Benchmark Electronics, Inc. (NYSE:BHE) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on BHE as the stock returned 16.3% during the same time frame and outperformed the market by an even larger margin.

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