Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.
Is Resolute Forest Products Inc (NYSE:RFP) a buy right now? Prominent investors are taking an optimistic view. The number of long hedge fund positions increased by 5 lately. Our calculations also showed that RFP isn’t among the 30 most popular stocks among hedge funds.
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 32 percentage points since May 2014 through March 12, 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We’re going to analyze the new hedge fund action surrounding Resolute Forest Products Inc (NYSE:RFP).
How are hedge funds trading Resolute Forest Products Inc (NYSE:RFP)?
At the end of the fourth quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 23% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in RFP a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Resolute Forest Products Inc (NYSE:RFP) was held by Fairfax Financial Holdings, which reported holding $242.2 million worth of stock at the end of December. It was followed by Chou Associates Management with a $36.3 million position. Other investors bullish on the company included Renaissance Technologies, Arrowstreet Capital, and Prescott Group Capital Management.
As aggregate interest increased, specific money managers have jumped into Resolute Forest Products Inc (NYSE:RFP) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the most valuable position in Resolute Forest Products Inc (NYSE:RFP). Marshall Wace LLP had $0.5 million invested in the company at the end of the quarter. Bradley Louis Radoff’s Fondren Management also initiated a $0.3 million position during the quarter. The following funds were also among the new RFP investors: David Harding’s Winton Capital Management, Minhua Zhang’s Weld Capital Management, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt..
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Resolute Forest Products Inc (NYSE:RFP) but similarly valued. We will take a look at Multi-Color Corporation (NASDAQ:LABL), MTS Systems Corporation (NASDAQ:MTSC), Nabors Industries Ltd. (NYSE:NBR), and ImmunoGen, Inc. (NASDAQ:IMGN). This group of stocks’ market valuations resemble RFP’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LABL | 10 | 17888 | 5 |
| MTSC | 12 | 104204 | 0 |
| NBR | 32 | 120080 | -7 |
| IMGN | 16 | 140927 | -2 |
| Average | 17.5 | 95775 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $96 million. That figure was $319 million in RFP’s case. Nabors Industries Ltd. (NYSE:NBR) is the most popular stock in this table. On the other hand Multi-Color Corporation (NASDAQ:LABL) is the least popular one with only 10 bullish hedge fund positions. Resolute Forest Products Inc (NYSE:RFP) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately RFP wasn’t nearly as popular as these 15 stock and hedge funds that were betting on RFP were disappointed as the stock returned -5.3% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
