It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. 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 INTL Fcstone Inc (NASDAQ:INTL).
INTL Fcstone Inc (NASDAQ:INTL) was in 10 hedge funds’ portfolios at the end of September. INTL shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. There were 11 hedge funds in our database with INTL positions at the end of the previous quarter. Our calculations also showed that INTL 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’ 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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jeffrey Bronchick of Cove Street 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. We’re going to check out the recent hedge fund action surrounding INTL Fcstone Inc (NASDAQ:INTL).
Hedge fund activity in INTL Fcstone Inc (NASDAQ:INTL)
Heading into the fourth quarter of 2019, a total of 10 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 10 hedge funds with a bullish position in INTL a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Among these funds, Private Capital Management held the most valuable stake in INTL Fcstone Inc (NASDAQ:INTL), which was worth $29.5 million at the end of the third quarter. On the second spot was Nine Ten Partners which amassed $28.9 million worth of shares. Cove Street Capital, Royce & Associates, and Renaissance Technologies 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 Nine Ten Partners allocated the biggest weight to INTL Fcstone Inc (NASDAQ:INTL), around 9.15% of its 13F portfolio. Private Capital Management is also relatively very bullish on the stock, dishing out 5.12 percent of its 13F equity portfolio to INTL.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Winton Capital 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 none of the 750+ hedge funds tracked by Insider Monkey identified INTL as a viable investment and initiated a position in the stock.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as INTL Fcstone Inc (NASDAQ:INTL) but similarly valued. We will take a look at Ingles Markets, Incorporated (NASDAQ:IMKTA), Celestica Inc. (NYSE:CLS), ConnectOne Bancorp Inc (NASDAQ:CNOB), and Despegar.com, Corp. (NYSE:DESP). This group of stocks’ market valuations are similar to INTL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IMKTA | 12 | 59791 | -1 |
| CLS | 13 | 69373 | 1 |
| CNOB | 12 | 48484 | 3 |
| DESP | 11 | 150886 | -1 |
| Average | 12 | 82134 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $93 million in INTL’s case. Celestica Inc. (NYSE:CLS) is the most popular stock in this table. On the other hand Despegar.com, Corp. (NYSE:DESP) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks INTL Fcstone Inc (NASDAQ:INTL) is even less popular than DESP. Hedge funds dodged a bullet by taking a bearish stance towards INTL. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately INTL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); INTL investors were disappointed as the stock returned -2.6% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
