Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost around 20%. Facebook, which was the second most popular stock, lost 14% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Quanex Building Products Corporation (NYSE:NX) shareholders have witnessed an increase in hedge fund interest of late. NX was in 14 hedge funds’ portfolios at the end of the third quarter of 2018. There were 10 hedge funds in our database with NX positions at the end of the previous quarter. Our calculations also showed that NX isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to view the new hedge fund action encompassing Quanex Building Products Corporation (NYSE:NX).
How are hedge funds trading Quanex Building Products Corporation (NYSE:NX)?
Heading into the fourth quarter of 2018, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 40% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards NX over the last 13 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, Praesidium Investment Management Company was the largest shareholder of Quanex Building Products Corporation (NYSE:NX), with a stake worth $63.3 million reported as of the end of September. Trailing Praesidium Investment Management Company was Royce & Associates, which amassed a stake valued at $14.5 million. Renaissance Technologies, Millennium Management, and Marshall Wace LLP were also very fond of the stock, giving the stock large weights in their portfolios.
As aggregate interest increased, key hedge funds have jumped into Quanex Building Products Corporation (NYSE:NX) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, established the most valuable position in Quanex Building Products Corporation (NYSE:NX). Marshall Wace LLP had $4.8 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron’s Algert Coldiron Investors also initiated a $0.6 million position during the quarter. The other funds with new positions in the stock are Michael Platt and William Reeves’s BlueCrest Capital Mgmt. and Joel Greenblatt’s Gotham Asset Management.
Let’s check out hedge fund activity in other stocks similar to Quanex Building Products Corporation (NYSE:NX). We will take a look at Everi Holdings Inc (NYSE:EVRI), Invesco Municipal Trust (NYSE:VKQ), QCR Holdings, Inc. (NASDAQ:QCRH), and Caesarstone Sdot-Yam Ltd (NASDAQ:CSTE). This group of stocks’ market values resemble NX’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EVRI | 25 | 238436 | 1 |
| VKQ | 3 | 765 | 0 |
| QCRH | 8 | 69171 | -3 |
| CSTE | 3 | 4503 | -2 |
| Average | 9.75 | 78219 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $78 million. That figure was $110 million in NX’s case. Everi Holdings Inc (NYSE:EVRI) is the most popular stock in this table. On the other hand Invesco Municipal Trust (NYSE:VKQ) is the least popular one with only 3 bullish hedge fund positions. Quanex Building Products Corporation (NYSE:NX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard EVRI might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
