Hedge Funds Are Still Crazy About Rosetta Stone Inc (RST)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Rosetta Stone Inc (NYSE:RST) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Rosetta Stone Inc (NYSE:RST) a good investment now? Hedge funds are taking some chips off the table but relative hedge fund sentiment is still extremely bullish. The number of bullish hedge fund positions retreated by 1 lately. Rosetta Stone Inc (NYSE:RST) was in 21 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 22. Our calculations also showed that RST 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

Jim Simons of Renaissance Technologies

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 junior gold mining stock. We are also checking out this lithium company which could 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 we’re going to view the key hedge fund action surrounding Rosetta Stone Inc (NYSE:RST).

What does smart money think about Rosetta Stone Inc (NYSE:RST)?

Heading into the third quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards RST over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Rosetta Stone Inc (NYSE:RST) was held by Renaissance Technologies, which reported holding $26 million worth of stock at the end of September. It was followed by Voss Capital with a $19.1 million position. Other investors bullish on the company included Harspring Capital Management, Osmium Partners, and AltraVue Capital. In terms of the portfolio weights assigned to each position Osmium Partners allocated the biggest weight to Rosetta Stone Inc (NYSE:RST), around 40.6% of its 13F portfolio. Voss Capital is also relatively very bullish on the stock, earmarking 12.75 percent of its 13F equity portfolio to RST.

Since Rosetta Stone Inc (NYSE:RST) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few fund managers that elected to cut their entire stakes in the second quarter. At the top of the heap, Arnaud Ajdler’s Engine Capital cut the largest position of the 750 funds monitored by Insider Monkey, totaling an estimated $1.9 million in stock. Jim Roumell’s fund, Roumell Asset Management, also cut its stock, about $1.8 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Rosetta Stone Inc (NYSE:RST). We will take a look at US Concrete Inc (NASDAQ:USCR), Donegal Group Inc (NASDAQ:DGICA), Aeglea BioTherapeutics, Inc. (NASDAQ:AGLE), Shoe Carnival, Inc. (NASDAQ:SCVL), The Marcus Corporation (NYSE:MCS), Personalis, Inc. (NASDAQ:PSNL), and Cambridge Bancorp (NASDAQ:CATC). This group of stocks’ market caps are similar to RST’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.1 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $119 million in RST’s case. Aeglea BioTherapeutics, Inc. (NASDAQ:AGLE) is the most popular stock in this table. On the other hand Donegal Group Inc (NASDAQ:DGICA) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Rosetta Stone Inc (NYSE:RST) is more popular among hedge funds. Our overall hedge fund sentiment score for RST is 82.6. 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 returned 24.8% in 2020 through the end of September but still managed to beat the market by 19.3 percentage points. Hedge funds were also right about betting on RST as the stock returned 77.8% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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