Did Hedge Funds Make The Right Call On Royal Gold, Inc (RGLD)?

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 Royal Gold, Inc (NASDAQ:RGLD) and determine whether the smart money was really smart about this stock.

Royal Gold, Inc (NASDAQ:RGLD) was in 28 hedge funds’ portfolios at the end of March. RGLD has experienced a decrease in support from the world’s most elite money managers recently. There were 30 hedge funds in our database with RGLD holdings at the end of the previous quarter. Our calculations also showed that RGLD 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.

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 S&P 500 ETFs by more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Paul Marshall of Marshall Wace

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 let’s take a look at the key hedge fund action regarding Royal Gold, Inc (NASDAQ:RGLD).

How are hedge funds trading Royal Gold, Inc (NASDAQ:RGLD)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RGLD over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Royal Gold, Inc (NASDAQ:RGLD), with a stake worth $58.4 million reported as of the end of September. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $43.5 million. Two Sigma Advisors, Millennium Management, and Citadel Investment Group 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 Horizon Asset Management allocated the biggest weight to Royal Gold, Inc (NASDAQ:RGLD), around 0.8% of its 13F portfolio. Kopernik Global Investors is also relatively very bullish on the stock, setting aside 0.56 percent of its 13F equity portfolio to RGLD.

Because Royal Gold, Inc (NASDAQ:RGLD) has faced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of fund managers that slashed their positions entirely in the first quarter. Intriguingly, Phill Gross and Robert Atchinson’s Adage Capital Management dropped the biggest position of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $6.1 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $0.9 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 2 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Royal Gold, Inc (NASDAQ:RGLD) but similarly valued. We will take a look at AGNC Investment Corp. (NASDAQ:AGNC), Melco Resorts & Entertainment Limited (NASDAQ:MLCO), The Scotts Miracle-Gro Company (NYSE:SMG), and Pegasystems Inc. (NASDAQ:PEGA). This group of stocks’ market caps match RGLD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $516 million. That figure was $237 million in RGLD’s case. Pegasystems Inc. (NASDAQ:PEGA) is the most popular stock in this table. On the other hand AGNC Investment Corp. (NASDAQ:AGNC) is the least popular one with only 27 bullish hedge fund positions. Royal Gold, Inc (NASDAQ:RGLD) 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 RGLD as the stock returned 42.2% during the second quarter and outperformed the market by an even larger margin.

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