Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in ACI Worldwide Inc (NASDAQ:ACIW)? The smart money sentiment can provide an answer to this question.
ACI Worldwide Inc (NASDAQ:ACIW) has experienced a decrease in hedge fund interest of late. ACIW was in 21 hedge funds’ portfolios at the end of September. There were 23 hedge funds in our database with ACIW holdings at the end of the previous quarter. Our calculations also showed that ACIW isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Matthew Hulsizer of PEAK6 Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the key hedge fund action regarding ACI Worldwide Inc (NASDAQ:ACIW).
Hedge fund activity in ACI Worldwide Inc (NASDAQ:ACIW)
At Q3’s end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in ACIW a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Cardinal Capital was the largest shareholder of ACI Worldwide Inc (NASDAQ:ACIW), with a stake worth $150.7 million reported as of the end of September. Trailing Cardinal Capital was P2 Capital Partners, which amassed a stake valued at $61.2 million. Wallace R. Weitz & Co., Fisher Asset Management, and Royce & Associates were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Sheffield Asset Management allocated the biggest weight to ACI Worldwide Inc (NASDAQ:ACIW), around 9.5% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, setting aside 4.98 percent of its 13F equity portfolio to ACIW.
Since ACI Worldwide Inc (NASDAQ:ACIW) has witnessed falling interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedge funds that decided to sell off their full holdings last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest stake of the 750 funds tracked by Insider Monkey, worth close to $23.8 million in stock, and Will Cook’s Sunriver Management was right behind this move, as the fund sold off about $20.6 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as ACI Worldwide Inc (NASDAQ:ACIW) but similarly valued. We will take a look at Texas Roadhouse Inc (NASDAQ:TXRH), YPF Sociedad Anonima (NYSE:YPF), Pebblebrook Hotel Trust (NYSE:PEB), and Exponent, Inc. (NASDAQ:EXPO). This group of stocks’ market values resemble ACIW’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TXRH | 22 | 225889 | -1 |
| YPF | 18 | 99931 | 3 |
| PEB | 12 | 104562 | -1 |
| EXPO | 18 | 115116 | 3 |
| Average | 17.5 | 136375 | 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 $136 million. That figure was $296 million in ACIW’s case. Texas Roadhouse Inc (NASDAQ:TXRH) is the most popular stock in this table. On the other hand Pebblebrook Hotel Trust (NYSE:PEB) is the least popular one with only 12 bullish hedge fund positions. ACI Worldwide Inc (NASDAQ:ACIW) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on ACIW as the stock returned 19.7% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
