Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Capstone Turbine Corporation (NASDAQ:CPST).
Hedge fund interest in Capstone Turbine Corporation (NASDAQ:CPST) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CPST to other stocks including Actinium Pharmaceuticals Inc (NYSE:ATNM), Basic Energy Services, Inc (NYSE:BAS), and National Holdings Corporation (NASDAQ:NHLD) to get a better sense of its popularity.
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.
Philip Hempleman of Ardsley Partners
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a gander at the fresh hedge fund action surrounding Capstone Turbine Corporation (NASDAQ:CPST).
How are hedge funds trading Capstone Turbine Corporation (NASDAQ:CPST)?
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CPST over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Armistice Capital held the most valuable stake in Capstone Turbine Corporation (NASDAQ:CPST), which was worth $2.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $0.9 million worth of shares. GMT Capital, Ancora Advisors, and Ardsley Partners 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 Armistice Capital allocated the biggest weight to Capstone Turbine Corporation (NASDAQ:CPST), around 0.18% of its 13F portfolio. Ardsley Partners is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to CPST.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Armistice Capital).
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Capstone Turbine Corporation (NASDAQ:CPST) but similarly valued. These stocks are Actinium Pharmaceuticals Inc (NYSE:ATNM), Basic Energy Services, Inc (NYSE:BAS), National Holdings Corporation (NASDAQ:NHLD), and Daxor Corporation (NYSE:DXR). This group of stocks’ market caps resemble CPST’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATNM | 6 | 3882 | 0 |
| BAS | 8 | 11744 | 0 |
| NHLD | 2 | 147 | 0 |
| DXR | 2 | 194 | -1 |
| Average | 4.5 | 3992 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $4 million in CPST’s case. Basic Energy Services, Inc (NYSE:BAS) is the most popular stock in this table. On the other hand National Holdings Corporation (NASDAQ:NHLD) is the least popular one with only 2 bullish hedge fund positions. Capstone Turbine Corporation (NASDAQ:CPST) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CPST wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CPST were disappointed as the stock returned -21.6% during the fourth quarter (through the end of November) 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.
