Is CSLT A Good Stock To Buy Now?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 817 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Castlight Health Inc (NYSE:CSLT).

Is CSLT a good stock to buy now? Investors who are in the know were reducing their bets on the stock. The number of bullish hedge fund bets were cut by 4 in recent months. Castlight Health Inc (NYSE:CSLT) was in 14 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 19. Our calculations also showed that CSLT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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.

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we’re going to take a peek at the new hedge fund action encompassing Castlight Health Inc (NYSE:CSLT).

Do Hedge Funds Think CSLT Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in CSLT 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.

Among these funds, Raging Capital Management held the most valuable stake in Castlight Health Inc (NYSE:CSLT), which was worth $11.4 million at the end of the third quarter. On the second spot was Whetstone Capital Advisors which amassed $5.7 million worth of shares. Renaissance Technologies, Royce & Associates, and Maverick Capital 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 Raging Capital Management allocated the biggest weight to Castlight Health Inc (NYSE:CSLT), around 11.01% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, designating 1.06 percent of its 13F equity portfolio to CSLT.

Due to the fact that Castlight Health Inc (NYSE:CSLT) has witnessed a decline in interest from hedge fund managers, logic holds that there lies a certain “tier” of hedge funds that slashed their positions entirely by the end of the third quarter. It’s worth mentioning that D. E. Shaw’s D E Shaw dumped the biggest investment of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $0.4 million in stock. Bradley Louis Radoff’s fund, Fondren Management, also dumped its stock, about $0.2 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Castlight Health Inc (NYSE:CSLT) but similarly valued. These stocks are PICO Holdings Inc (NASDAQ:PICO), Stellus Capital Investment Corporation (NYSE:SCM), Telenav Inc (NASDAQ:TNAV), New Age Beverages Corporation (NASDAQ:NBEV), Ampio Pharmaceuticals, Inc. (NASDAQ:AMPE), Kindred Biosciences Inc (NASDAQ:KIN), and GasLog Partners LP (NYSE:GLOP). This group of stocks’ market caps match CSLT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $27 million in CSLT’s case. Telenav Inc (NASDAQ:TNAV) is the most popular stock in this table. On the other hand Ampio Pharmaceuticals, Inc. (NASDAQ:AMPE) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Castlight Health Inc (NYSE:CSLT) is more popular among hedge funds. Our overall hedge fund sentiment score for CSLT is 73.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still managed to beat the market by 16.2 percentage points. Hedge funds were also right about betting on CSLT, though not to the same extent, as the stock returned 11.5% since the end of September (through December 8th) and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.