We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Rapid7 Inc (NASDAQ:RPD) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Rapid7 Inc (NASDAQ:RPD) was in 23 hedge funds’ portfolios at the end of the fourth quarter of 2019. RPD has seen a decrease in enthusiasm from smart money in recent months. There were 28 hedge funds in our database with RPD holdings at the end of the previous quarter. Our calculations also showed that RPD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Mark Kingdon of Kingdon Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the recent hedge fund action regarding Rapid7 Inc (NASDAQ:RPD).
What does smart money think about Rapid7 Inc (NASDAQ:RPD)?
Heading into the first quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RPD over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, SQN Investors held the most valuable stake in Rapid7 Inc (NASDAQ:RPD), which was worth $69 million at the end of the third quarter. On the second spot was Columbus Circle Investors which amassed $41.5 million worth of shares. Citadel Investment Group, Two Sigma Advisors, and Kingdon 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 SQN Investors allocated the biggest weight to Rapid7 Inc (NASDAQ:RPD), around 6.37% of its 13F portfolio. Kingdon Capital is also relatively very bullish on the stock, earmarking 2.63 percent of its 13F equity portfolio to RPD.
Due to the fact that Rapid7 Inc (NASDAQ:RPD) has experienced falling interest from the smart money, it’s safe to say that there were a few funds who were dropping their entire stakes in the third quarter. Intriguingly, Renaissance Technologies dumped the largest investment of the “upper crust” of funds tracked by Insider Monkey, comprising close to $8.2 million in stock. Kevin McCarthy’s fund, Breakline Capital, also said goodbye to its stock, about $4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 5 funds in the third quarter.
Let’s now review hedge fund activity in other stocks similar to Rapid7 Inc (NASDAQ:RPD). These stocks are El Paso Electric Company (NYSE:EE), Commscope Holding Company Inc (NASDAQ:COMM), Spirit Airlines Incorporated (NYSE:SAVE), and Olin Corporation (NYSE:OLN). All of these stocks’ market caps resemble RPD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EE | 15 | 343255 | 1 |
| COMM | 29 | 968776 | 5 |
| SAVE | 37 | 329134 | 9 |
| OLN | 33 | 359098 | 5 |
| Average | 28.5 | 500066 | 5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $500 million. That figure was $228 million in RPD’s case. Spirit Airlines Incorporated (NYSE:SAVE) is the most popular stock in this table. On the other hand El Paso Electric Company (NYSE:EE) is the least popular one with only 15 bullish hedge fund positions. Rapid7 Inc (NASDAQ:RPD) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately RPD wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RPD investors were disappointed as the stock returned -24.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
