Hedge Funds Are Dipping Their Toes Into Landstar System, Inc. (LSTR)

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 Landstar System, Inc. (NASDAQ:LSTR) and determine whether hedge funds had an edge regarding this stock.

Is Landstar System, Inc. (NASDAQ:LSTR) a first-rate investment today? Hedge funds were taking a bullish view. The number of bullish hedge fund positions increased by 1 recently. Landstar System, Inc. (NASDAQ:LSTR) was in 23 hedge funds’ portfolios at the end of June. The all time high for this statistics is 28. Our calculations also showed that LSTR 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.

Bruce Kovner of Caxton Associates LP

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 precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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 go over the new hedge fund action surrounding Landstar System, Inc. (NASDAQ:LSTR).

How are hedge funds trading Landstar System, Inc. (NASDAQ:LSTR)?

At second quarter’s end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in LSTR a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Chuck Royce’s Royce & Associates has the biggest position in Landstar System, Inc. (NASDAQ:LSTR), worth close to $61.7 million, amounting to 0.7% of its total 13F portfolio. Coming in second is Balyasny Asset Management, led by Dmitry Balyasny, holding a $44.9 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other members of the smart money that hold long positions include Cliff Asness’s AQR Capital Management, Noam Gottesman’s GLG Partners and Alexander Mitchell’s Scopus Asset Management. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Landstar System, Inc. (NASDAQ:LSTR), around 0.68% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, designating 0.51 percent of its 13F equity portfolio to LSTR.

As aggregate interest increased, some big names were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in Landstar System, Inc. (NASDAQ:LSTR). Balyasny Asset Management had $44.9 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $0.6 million position during the quarter. The following funds were also among the new LSTR investors: Donald Sussman’s Paloma Partners, Ran Pang’s Quantamental Technologies, and Bruce Kovner’s Caxton Associates LP.

Let’s check out hedge fund activity in other stocks similar to Landstar System, Inc. (NASDAQ:LSTR). We will take a look at II-VI, Inc. (NASDAQ:IIVI), CAE, Inc. (NYSE:CAE), Noble Energy, Inc. (NASDAQ:NBL), Switch, Inc. (NYSE:SWCH), Grand Canyon Education Inc (NASDAQ:LOPE), Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN), and Tetra Tech, Inc. (NASDAQ:TTEK). This group of stocks’ market valuations match LSTR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $324 million. That figure was $207 million in LSTR’s case. Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN) is the most popular stock in this table. On the other hand CAE, Inc. (NYSE:CAE) is the least popular one with only 14 bullish hedge fund positions. Landstar System, Inc. (NASDAQ:LSTR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LSTR is 46.7. 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. 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 still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on LSTR as the stock returned 11.9% in the third quarter and outperformed the market by an even larger margin.

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