Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Target Hospitality Corp. (NASDAQ:TH) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of June. At the end of this article we will also compare TH to other stocks including Boston Private Financial Holdings, Inc. (NASDAQ:BPFH), Third Point Reinsurance Ltd (NYSE:TPRE), and Odonate Therapeutics, Inc. (NASDAQ:ODT) to get a better sense of its popularity. Our calculations also showed that TH isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s analyze the fresh hedge fund action encompassing Target Hospitality Corp. (NASDAQ:TH).
How are hedge funds trading Target Hospitality Corp. (NASDAQ:TH)?
At the end of the second quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 0 hedge funds with a bullish position in TH 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.
Among these funds, Rubric Capital Management held the most valuable stake in Target Hospitality Corp. (NASDAQ:TH), which was worth $22.8 million at the end of the second quarter. On the second spot was Private Capital Management which amassed $17.4 million worth of shares. Moreover, Moore Global Investments, Arrowgrass Capital Partners, and Element Capital Management were also bullish on Target Hospitality Corp. (NASDAQ:TH), allocating a large percentage of their portfolios to this stock.
Since Target Hospitality Corp. (NASDAQ:TH) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there exists a select few hedgies that decided to sell off their positions entirely in the second quarter. It’s worth mentioning that Jacob Doft’s Highline Capital Management cut the biggest stake of all the hedgies followed by Insider Monkey, worth an estimated $4.8 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dumped its stock, about $1.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Target Hospitality Corp. (NASDAQ:TH) but similarly valued. We will take a look at Boston Private Financial Holdings, Inc. (NASDAQ:BPFH), Third Point Reinsurance Ltd (NYSE:TPRE), Odonate Therapeutics, Inc. (NASDAQ:ODT), and Amphastar Pharmaceuticals Inc (NASDAQ:AMPH). This group of stocks’ market valuations are closest to TH’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BPFH | 13 | 62360 | -1 |
| TPRE | 20 | 65115 | 1 |
| ODT | 13 | 634369 | 4 |
| AMPH | 9 | 22407 | -1 |
| Average | 13.75 | 196063 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $196 million. That figure was $89 million in TH’s case. Third Point Reinsurance Ltd (NYSE:TPRE) is the most popular stock in this table. On the other hand Amphastar Pharmaceuticals Inc (NASDAQ:AMPH) is the least popular one with only 9 bullish hedge fund positions. Target Hospitality Corp. (NASDAQ:TH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately TH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TH were disappointed as the stock returned -25.2% during 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
