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 the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same 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 RBC Bearings Incorporated (NASDAQ:ROLL).
RBC Bearings Incorporated (NASDAQ:ROLL) was in 7 hedge funds’ portfolios at the end of September. ROLL shareholders have witnessed an increase in hedge fund interest lately. There were 6 hedge funds in our database with ROLL positions at the end of the previous quarter. Our calculations also showed that ROLL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the recent hedge fund action encompassing RBC Bearings Incorporated (NASDAQ:ROLL).
How are hedge funds trading RBC Bearings Incorporated (NASDAQ:ROLL)?
Heading into the fourth quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ROLL over the last 17 quarters. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of RBC Bearings Incorporated (NASDAQ:ROLL), with a stake worth $47.8 million reported as of the end of September. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $9 million. Driehaus Capital, Arrowstreet Capital, and AQR Capital Management 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 Royce & Associates allocated the biggest weight to RBC Bearings Incorporated (NASDAQ:ROLL), around 0.44% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to ROLL.
Consequently, some big names were leading the bulls’ herd. Renaissance Technologies created the largest position in RBC Bearings Incorporated (NASDAQ:ROLL). Renaissance Technologies had $9 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also made a $2.1 million investment in the stock during the quarter. The other funds with brand new ROLL positions are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Donald Sussman’s Paloma Partners.
Let’s go over hedge fund activity in other stocks similar to RBC Bearings Incorporated (NASDAQ:ROLL). We will take a look at Sterling Bancorp (NYSE:STL), Lumentum Holdings Inc (NASDAQ:LITE), Pivotal Software, Inc. (NYSE:PVTL), and frontdoor, inc. (NASDAQ:FTDR). This group of stocks’ market values match ROLL’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| STL | 23 | 407369 | 2 |
| LITE | 29 | 219330 | -1 |
| PVTL | 22 | 275424 | 2 |
| FTDR | 38 | 735584 | -2 |
| Average | 28 | 409427 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $409 million. That figure was $62 million in ROLL’s case. frontdoor, inc. (NASDAQ:FTDR) is the most popular stock in this table. On the other hand Pivotal Software, Inc. (NYSE:PVTL) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks RBC Bearings Incorporated (NASDAQ:ROLL) is even less popular than PVTL. Hedge funds dodged a bullet by taking a bearish stance towards ROLL. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ROLL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ROLL investors were disappointed as the stock returned 0% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
