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 Farmer Bros. Co. (NASDAQ:FARM).
Farmer Bros. Co. (NASDAQ:FARM) shareholders have witnessed an increase in enthusiasm from smart money lately. FARM was in 10 hedge funds’ portfolios at the end of June. There were 7 hedge funds in our database with FARM holdings at the end of the previous quarter. Our calculations also showed that FARM 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely 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. We’re going to go over the latest hedge fund action surrounding Farmer Bros. Co. (NASDAQ:FARM).
Hedge fund activity in Farmer Bros. Co. (NASDAQ:FARM)
Heading into the third quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 43% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards FARM over the last 16 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
More specifically, Trigran Investments was the largest shareholder of Farmer Bros. Co. (NASDAQ:FARM), with a stake worth $32.3 million reported as of the end of March. Trailing Trigran Investments was Adage Capital Management, which amassed a stake valued at $11 million. Renaissance Technologies, Royce & Associates, and GAMCO Investors were also very fond of the stock, giving the stock large weights in their portfolios.
As aggregate interest increased, key hedge funds were leading the bulls’ herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, established the biggest position in Farmer Bros. Co. (NASDAQ:FARM). Adage Capital Management had $11 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $1 million investment in the stock during the quarter. The only other fund with a new position in the stock is Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Farmer Bros. Co.(NASDAQ:FARM) but similarly valued. We will take a look at Pareteum Corporation (NASDAQ:TEUM), Howard Bancorp Inc (NASDAQ:HBMD), Parker Drilling Company (NYSE:PKD), and Central Valley Community Bancorp (NASDAQ:CVCY). All of these stocks’ market caps resemble FARM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TEUM | 3 | 1836 | -6 |
| HBMD | 2 | 12328 | 0 |
| PKD | 4 | 110169 | 4 |
| CVCY | 3 | 17857 | -1 |
| Average | 3 | 35548 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $36 million. That figure was $64 million in FARM’s case. Parker Drilling Company (NYSE:PKD) is the most popular stock in this table. On the other hand Howard Bancorp Inc (NASDAQ:HBMD) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Farmer Bros. Co. (NASDAQ:FARM) is more popular among hedge funds. 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. Unfortunately FARM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FARM were disappointed as the stock returned -20.9% during the third quarter 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.
