Hedge Funds Are Coming Back To RLI Corp. (RLI)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding RLI Corp. (NYSE:RLI) and determine whether hedge funds had an edge regarding this stock.

Is RLI Corp. (NYSE:RLI) a good investment today? The smart money was becoming hopeful. The number of bullish hedge fund bets improved by 5 in recent months. RLI Corp. (NYSE:RLI) was in 20 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. Our calculations also showed that RLI isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 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 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

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s analyze the recent hedge fund action surrounding RLI Corp. (NYSE:RLI).

How are hedge funds trading RLI Corp. (NYSE:RLI)?

At second quarter’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in RLI a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in RLI Corp. (NYSE:RLI) was held by Markel Gayner Asset Management, which reported holding $98.3 million worth of stock at the end of September. It was followed by Polar Capital with a $22 million position. Other investors bullish on the company included Royce & Associates, Renaissance Technologies, and PDT Partners. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to RLI Corp. (NYSE:RLI), around 1.83% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, setting aside 0.21 percent of its 13F equity portfolio to RLI.

As aggregate interest increased, key hedge funds were leading the bulls’ herd. Millennium Management, managed by Israel Englander, established the most outsized position in RLI Corp. (NYSE:RLI). Millennium Management had $1.3 million invested in the company at the end of the quarter. Parvinder Thiara’s Athanor Capital also initiated a $0.9 million position during the quarter. The other funds with new positions in the stock are Lee Ainslie’s Maverick Capital, Qing Li’s Sciencast Management, and Karim Abbadi and Edward McBride’s Centiva Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as RLI Corp. (NYSE:RLI) but similarly valued. We will take a look at Agios Pharmaceuticals Inc (NASDAQ:AGIO), Tapestry, Inc. (NYSE:TPR), Simpson Manufacturing Co, Inc. (NYSE:SSD), Alamos Gold Inc (NYSE:AGI), DouYu International Holdings Limited (NASDAQ:DOYU), Momo Inc (NASDAQ:MOMO), and Cogent Communications Holdings Inc. (NASDAQ:CCOI). This group of stocks’ market caps are closest to RLI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $389 million. That figure was $160 million in RLI’s case. Tapestry, Inc. (NYSE:TPR) is the most popular stock in this table. On the other hand DouYu International Holdings Limited (NASDAQ:DOYU) is the least popular one with only 15 bullish hedge fund positions. RLI Corp. (NYSE:RLI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RLI is 34. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately RLI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RLI investors were disappointed as the stock returned 2.2% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.