A market correction in the third quarter, spurred by a number of global macroeconomic concerns ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2000 ETF underperformed the S&P 500 ETF by 14 percentage points between June 25 and the end of October. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let’s study the hedge fund sentiment to see how those concerns affected their ownership of FalconStor Software, Inc. (NASDAQ:FALC) during the quarter.
FalconStor Software, Inc. (NASDAQ:FALC) was in 6 hedge funds’ portfolios at the end of September. FALC shareholders have witnessed a slight increase in activity from the world’s largest hedge funds recently. There were 5 hedge funds in our database with FALC holdings at the end of the previous quarter. At the end of this article we will also compare FALC to other stocks, including Crown Crafts, Inc. (NASDAQ:CRWS), Unwired Planet Inc (NASDAQ:UPIP), and ITT Educational Services, Inc. (NYSE:ESI), to get a better sense of its popularity.
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To the average investor, there are tons of formulas shareholders use to grade their holdings. Some of the most underrated formulas are hedge fund and insider trading interest. Our researchers have shown that, historically, those who follow the top picks of the elite investment managers can outperform their index-focused peers by a superb margin (see the details here).
Now, let’s view the recent action regarding FalconStor Software, Inc. (NASDAQ:FALC).
What have hedge funds been doing with FalconStor Software, Inc. (NASDAQ:FALC)?
Heading into Q4, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the previous quarter. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Nantahala Capital Management, managed by Wilmot B. Harkey and Daniel Mack, holds the biggest position in FalconStor Software, Inc. (NASDAQ:FALC). Nantahala Capital Management has a $7.5 million position in the stock, comprising 1% of its 13F portfolio. Sitting at the No. 2 spot is John Zaro’s Bourgeon Capital, with a $2.1 million position; 1.5% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism consist of Paul Solit’s Potomac Capital Management, Mario Gabelli’s GAMCO Investors, and David Cohen and Harold Levy’s Iridian Asset Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as FalconStor Software, Inc. (NASDAQ:FALC) but similarly valued. These stocks are Crown Crafts, Inc. (NASDAQ:CRWS), Unwired Planet Inc (NASDAQ:UPIP), ITT Educational Services, Inc. (NYSE:ESI), and Richardson Electronics, Ltd. (NASDAQ:RELL). This group of stocks’ market values resemble FALC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CRWS | 6 | 16743 | 0 |
| UPIP | 11 | 32314 | 0 |
| ESI | 13 | 20029 | -2 |
| RELL | 6 | 19009 | 0 |
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $22 million, higher than the $12 million in FALC’s case. ITT Educational Services, Inc. (NYSE:ESI) is the most popular stock in this table. On the other hand, Crown Crafts, Inc. (NASDAQ:CRWS) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks FalconStor Software, Inc. (NASDAQ:FALC) is even less popular than CRWS. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
