Did hedge funds see Green Dot Corporation (NYSE:GDOT)’s big jump today coming a mile (or at least a few months) off? Shares of the prepaid debit card issuer have surged to as high as $20.76 per share on today, a massive 35.6% from its closing price on Monday. The rally comes as the company announced Monday afternoon that it will remain the program manager and issuing bank for the Wal-Mart Stores, Inc. (NYSE:WMT) MoneyCard after signing a new five-year deal with the monolithic retailer. The move wasn’t totally unexpected, as the pair have been in business together since 2007 and just last year launched a joint mobile checking account primarily aimed at Wal-Mart’s U.S customers. Nonetheless, there was heavy competition for the contract, which Green Dot did not take lightly upon being awarded the renewed deal, expressing gratitude and satisfaction in a statement issued yesterday. Furthermore, Green Dot Corporation has also revealed that its Board of Directors approved a $150 million share buyback program. In other news, Compass Point, in a note released today, has lifted its target price on Green Dot Corporation’s stock to $22 from a previous $18 target, with the stock already pushing towards those levels in morning trading today. Should investors be concerned over the decrease in hedge fund sentiment however?
Let’s first take a step back and analyze how tracking hedge funds can help an everyday investor. Through our research, we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month on average between 1999 and 2012. On the other hand, the most popular large-cap picks of hedge funds underperformed the same index by seven basis points per month during the same period. This is likely a surprise to many investors, who think of small-caps as risky, unpredictable stocks and put more faith in large-cap stocks. In forward tests since August 2012, these top small-cap stocks beat the market by an impressive 84 percentage points, returning over 144% (read the details here). Hence, a retail investor needs to isolate himself from the herd and take advantage of the best growth opportunities in the market by concentrating on small-cap stocks.
Tracking the interest of insiders and hedge funds in a stock is a powerful tool to provide valuable insight to investors. While some investors scoff at the notion of worrying about hedge fund activity, believing their poor returns in recent years to be a reflection of poor stock picking ability, that is not actually the case. Hedge funds have under-performed the market for several reasons which don’t actually have anything to do with stock picking, but rather with the composition of their investments. Insider activity meanwhile is just as important, and research studies have proven the efficacy of piggybacking insider purchases.
Let’s start then with the insider activity at Green Dot Corporation (NYSE:GDOT), where there was a large purchase of the company’s stock by Director Steven Streit in the first quarter of the year. Streit purchased 206,800 shares of the company at the start of February. In terms of sales, Chief Operating Officer Kuan Archer sold 9,375 shares of the company by the start of 2015. Because of the importance of insider purchases, we can consider this an extremely positive indicator for the stock.
Let’s move on to look at how smart money has been treating Green Dot Corporation (NYSE:GDOT) recently.
