The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Royal Bank of Canada (NYSE:RY), and what that likely means for the prospects of the company and its stock.
Is Royal Bank of Canada (NYSE:RY) ready to rally soon? Investors who are in the know are becoming more confident. The number of bullish hedge fund positions increased by 4 lately. Our calculations also showed that ry isn’t among the 30 most popular stocks among hedge funds. RY was in 17 hedge funds’ portfolios at the end of September. There were 13 hedge funds in our database with RY holdings at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let’s take a gander at the fresh hedge fund action encompassing Royal Bank of Canada (NYSE:RY).
How have hedgies been trading Royal Bank of Canada (NYSE:RY)?
Heading into the fourth quarter of 2018, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 31% from the second quarter of 2018. By comparison, 15 hedge funds held shares or bullish call options in RY heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Arrowstreet Capital held the most valuable stake in Royal Bank of Canada (NYSE:RY), which was worth $430.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $152.9 million worth of shares. Moreover, AQR Capital Management, Two Sigma Advisors, and Bridgewater Associates were also bullish on Royal Bank of Canada (NYSE:RY), allocating a large percentage of their portfolios to this stock.
Consequently, specific money managers were leading the bulls’ herd. Stevens Capital Management, managed by Matthew Tewksbury, assembled the biggest position in Royal Bank of Canada (NYSE:RY). Stevens Capital Management had $2.5 million invested in the company at the end of the quarter. Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors also initiated a $2.1 million position during the quarter. The other funds with brand new RY positions are Dmitry Balyasny’s Balyasny Asset Management and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Royal Bank of Canada (NYSE:RY) but similarly valued. These stocks are Eli Lilly and Company (NYSE:LLY), Altria Group Inc (NYSE:MO), Novo Nordisk A/S (NYSE:NVO), and United Technologies Corporation (NYSE:UTX). All of these stocks’ market caps are similar to RY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LLY | 40 | 1709100 | 7 |
| MO | 41 | 1332680 | 6 |
| NVO | 17 | 1845947 | -1 |
| UTX | 59 | 7281525 | 7 |
| Average | 39.25 | 3042313 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 39.25 hedge funds with bullish positions and the average amount invested in these stocks was $3.04 billion. That figure was $902 million in RY’s case. United Technologies Corporation (NYSE:UTX) is the most popular stock in this table. On the other hand Novo Nordisk A/S (NYSE:NVO) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Royal Bank of Canada (NYSE:RY) is even less popular than NVO. 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.
Disclosure: None. This article was originally published at Insider Monkey.
