Is Lydall, Inc. (LDL) Going to Burn These Hedge Funds?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Lydall, Inc. (NYSE:LDL), and what that likely means for the prospects of the company and its stock.

Lydall, Inc. (NYSE:LDL) shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 13 hedge funds in our database with LDL positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as HealthStream, Inc. (NASDAQ:HSTM), Incontact Inc (NASDAQ:SAAS), and Web.com Group Inc (NASDAQ:WEB) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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Now, let’s view the recent action encompassing Lydall, Inc. (NYSE:LDL).

Hedge fund activity in Lydall, Inc. (NYSE:LDL)

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, down 8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LDL over the last 5 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Royce & Associates, led by Chuck Royce, holds the largest position in Lydall, Inc. (NYSE:LDL). According to its latest 13F filing, the fund has a $17.8 million position in the stock, comprising 0.1% of its 13F portfolio. On Royce & Associates’s heels is Renaissance Technologies, one of the largest hedge funds in the world, with a $17.1 million position; the fund has less than 0.1% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions include Richard Driehaus’s Driehaus Capital, Paul Hondros’s AlphaOne Capital Partners and Cliff Asness’s AQR Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Because Lydall, Inc. (NYSE:LDL) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there were a few money managers that elected to cut their entire stakes last quarter. It’s worth mentioning that Israel Englander’s Millennium Management sold off the biggest stake of the 700 funds tracked by Insider Monkey, comprising close to $0.9 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund said goodbye to its call options holding.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Lydall, Inc. (NYSE:LDL) but similarly valued. These stocks are HealthStream, Inc. (NASDAQ:HSTM), Incontact Inc (NASDAQ:SAAS), Web.com Group Inc (NASDAQ:WEB), and GTT Communications Inc (NYSE:GTT). This group of stocks’ market caps resemble LDL’s market cap.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $67 million in LDL’s case. Web.com Group Inc (NASDAQ:WEB) is the most popular stock in this table. On the other hand HealthStream, Inc. (NASDAQ:HSTM) is the least popular one with only 9 bullish hedge fund positions. Lydall, Inc. (NYSE:LDL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard WEB might be a better candidate to consider taking a long position in.

Disclosure: none.