Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Purple Innovation, Inc. (NASDAQ:PRPL).
Purple Innovation, Inc. (NASDAQ:PRPL) investors should be aware of an increase in hedge fund sentiment recently. PRPL was in 5 hedge funds’ portfolios at the end of the third quarter of 2019. There were 3 hedge funds in our database with PRPL positions at the end of the previous quarter. Our calculations also showed that PRPL 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Paul Marshall of Marshall Wace
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to take a gander at the latest hedge fund action encompassing Purple Innovation, Inc. (NASDAQ:PRPL).
How are hedge funds trading Purple Innovation, Inc. (NASDAQ:PRPL)?
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 67% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in PRPL over the last 17 quarters. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in Purple Innovation, Inc. (NASDAQ:PRPL) was held by Coliseum Capital, which reported holding $46.9 million worth of stock at the end of September. It was followed by Royce & Associates with a $1 million position. Other investors bullish on the company included Renaissance Technologies, Marshall Wace, and Teton Capital. In terms of the portfolio weights assigned to each position Coliseum Capital allocated the biggest weight to Purple Innovation, Inc. (NASDAQ:PRPL), around 13.12% of its 13F portfolio. Teton Capital is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to PRPL.
Consequently, specific money managers were leading the bulls’ herd. Renaissance Technologies, founded by Jim Simons, initiated the most valuable position in Purple Innovation, Inc. (NASDAQ:PRPL). Renaissance Technologies had $0.5 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace also made a $0.1 million investment in the stock during the quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Purple Innovation, Inc. (NASDAQ:PRPL) but similarly valued. We will take a look at Gladstone Investment Corporation (NASDAQ:GAIN), Meridian Bioscience, Inc. (NASDAQ:VIVO), Green Plains Inc. (NASDAQ:GPRE), and Extraction Oil & Gas, Inc. (NASDAQ:XOG). This group of stocks’ market valuations are closest to PRPL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GAIN | 2 | 1970 | -2 |
| VIVO | 16 | 53017 | -1 |
| GPRE | 16 | 100604 | 0 |
| XOG | 17 | 57652 | 0 |
| Average | 12.75 | 53311 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $49 million in PRPL’s case. Extraction Oil & Gas, Inc. (NASDAQ:XOG) is the most popular stock in this table. On the other hand Gladstone Investment Corporation (NASDAQ:GAIN) is the least popular one with only 2 bullish hedge fund positions. Purple Innovation, Inc. (NASDAQ:PRPL) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on PRPL, though not to the same extent, as the stock returned 6.2% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
