Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Forterra, Inc. (NASDAQ:FRTA).
Forterra, Inc. (NASDAQ:FRTA) was in 11 hedge funds’ portfolios at the end of the second quarter of 2019. FRTA has experienced a decrease in support from the world’s most elite money managers lately. There were 12 hedge funds in our database with FRTA holdings at the end of the previous quarter. Our calculations also showed that FRTA 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. Let’s take a glance at the latest hedge fund action regarding Forterra, Inc. (NASDAQ:FRTA).
Hedge fund activity in Forterra, Inc. (NASDAQ:FRTA)
At the end of the second quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. By comparison, 8 hedge funds held shares or bullish call options in FRTA 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 Forterra, Inc. (NASDAQ:FRTA) was held by Electron Capital Partners, which reported holding $14.3 million worth of stock at the end of March. It was followed by Brigade Capital with a $13.6 million position. Other investors bullish on the company included Royce & Associates, Redwood Capital Management, and Water Asset Management.
Seeing as Forterra, Inc. (NASDAQ:FRTA) has experienced declining sentiment from hedge fund managers, we can see that there exists a select few funds that decided to sell off their positions entirely by the end of the second quarter. Interestingly, Roger Ibbotson’s Zebra Capital Management cut the largest stake of all the hedgies watched by Insider Monkey, totaling an estimated $0.2 million in stock. Cliff Asness’s fund, AQR Capital Management, also dropped its stock, about $0.1 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 1 funds by the end of the second quarter.
Let’s check out hedge fund activity in other stocks similar to Forterra, Inc. (NASDAQ:FRTA). We will take a look at Lawson Products, Inc. (NASDAQ:LAWS), Summit Financial Group, Inc. (NASDAQ:SMMF), Teekay Tankers Ltd. (NYSE:TNK), and DryShips Inc. (NASDAQ:DRYS). This group of stocks’ market values resemble FRTA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LAWS | 5 | 15089 | 1 |
| SMMF | 2 | 8578 | 0 |
| TNK | 12 | 24981 | 0 |
| DRYS | 2 | 619 | -1 |
| Average | 5.25 | 12317 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.25 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $51 million in FRTA’s case. Teekay Tankers Ltd. (NYSE:TNK) is the most popular stock in this table. On the other hand Summit Financial Group, Inc. (NASDAQ:SMMF) is the least popular one with only 2 bullish hedge fund positions. Forterra, Inc. (NASDAQ:FRTA) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on FRTA as the stock returned 45.5% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.