The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Fastenal Company (NASDAQ:FAST), and what that likely means for the prospects of the company and its stock.
Fastenal Company (NASDAQ:FAST) was in 23 hedge funds’ portfolios at the end of September. FAST investors should pay attention to a decrease in activity from the world’s largest hedge funds in recent months. There were 24 hedge funds in our database with FAST holdings at the end of the previous quarter. Our calculations also showed that FAST isn’t among the 30 most popular stocks among hedge funds.
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 18 percentage points since May 2014 through December 3, 2018 (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.
Let’s take a peek at the recent hedge fund action surrounding Fastenal Company (NASDAQ:FAST).
Hedge fund activity in Fastenal Company (NASDAQ:FAST)
Heading into the fourth quarter of 2018, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the second quarter of 2018. By comparison, 32 hedge funds held shares or bullish call options in FAST heading into this year. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
The largest stake in Fastenal Company (NASDAQ:FAST) was held by Route One Investment Company, which reported holding $455.4 million worth of stock at the end of September. It was followed by Bares Capital Management with a $264.5 million position. Other investors bullish on the company included Cantillon Capital Management, Cantillon Capital Management, and Millennium Management.
Due to the fact that Fastenal Company (NASDAQ:FAST) has experienced falling interest from hedge fund managers, it’s safe to say that there was a specific group of funds that elected to cut their entire stakes in the third quarter. Intriguingly, Joe Milano’s Greenhouse Funds dropped the largest investment of the 700 funds tracked by Insider Monkey, comprising an estimated $7.2 million in stock, and Greg Poole’s Echo Street Capital Management was right behind this move, as the fund dumped about $5.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to Fastenal Company (NASDAQ:FAST). These stocks are L-3 Technologies, Inc. (NYSE:LLL), SVB Financial Group (NASDAQ:SIVB), STMicroelectronics N.V. (NYSE:STM), and Markel Corporation (NYSE:MKL). This group of stocks’ market valuations are similar to FAST’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LLL | 26 | 867450 | 6 |
| SIVB | 37 | 1451045 | 0 |
| STM | 11 | 118040 | -7 |
| MKL | 20 | 1151533 | 4 |
| Average | 23.5 | 897017 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $897 million. That figure was $1.43 billion in FAST’s case. SVB Financial Group (NASDAQ:SIVB) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 11 bullish hedge fund positions. Fastenal Company (NASDAQ:FAST) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard SIVB might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
