Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
i3 Verticals, Inc. (NASDAQ:IIIV) investors should be aware of a decrease in hedge fund interest of late. IIIV was in 10 hedge funds’ portfolios at the end of September. There were 13 hedge funds in our database with IIIV positions at the end of the previous quarter. Our calculations also showed that IIIV 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.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.
Richard Driehaus of Driehaus 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 gander at the recent hedge fund action regarding i3 Verticals, Inc. (NASDAQ:IIIV).
Hedge fund activity in i3 Verticals, Inc. (NASDAQ:IIIV)
At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards IIIV over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Harbert Management was the largest shareholder of i3 Verticals, Inc. (NASDAQ:IIIV), with a stake worth $14.1 million reported as of the end of September. Trailing Harbert Management was Driehaus Capital, which amassed a stake valued at $12 million. ACK Asset Management, Crosslink Capital, and D E Shaw 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 Harbert Management allocated the biggest weight to i3 Verticals, Inc. (NASDAQ:IIIV), around 20.94% of its 13F portfolio. ACK Asset Management is also relatively very bullish on the stock, setting aside 2.46 percent of its 13F equity portfolio to IIIV.
Since i3 Verticals, Inc. (NASDAQ:IIIV) has faced a decline in interest from the smart money, we can see that there was a specific group of hedgies that decided to sell off their full holdings by the end of the third quarter. At the top of the heap, Renaissance Technologies dropped the biggest investment of all the hedgies followed by Insider Monkey, worth an estimated $1.7 million in stock. Anand Parekh’s fund, Alyeska Investment Group, also dropped its stock, about $1.7 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as i3 Verticals, Inc. (NASDAQ:IIIV) but similarly valued. These stocks are Endurance International Group Holdings Inc (NASDAQ:EIGI), One Liberty Properties, Inc. (NYSE:OLP), Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX), and Team, Inc. (NYSE:TISI). This group of stocks’ market valuations match IIIV’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EIGI | 13 | 80023 | 2 |
| OLP | 5 | 30386 | 1 |
| CPRX | 12 | 124014 | 2 |
| TISI | 13 | 89501 | 1 |
| Average | 10.75 | 80981 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $81 million. That figure was $49 million in IIIV’s case. Endurance International Group Holdings Inc (NASDAQ:EIGI) is the most popular stock in this table. On the other hand One Liberty Properties, Inc. (NYSE:OLP) is the least popular one with only 5 bullish hedge fund positions. i3 Verticals, Inc. (NASDAQ:IIIV) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on IIIV as the stock returned 35.8% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
