Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same 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 is wise to check hedge fund activity before you invest your time or your savings on a stock like Ready Capital Corporation (NYSE:RC).
Is Ready Capital Corporation (NYSE:RC) the right investment to pursue these days? The best stock pickers are getting less optimistic. The number of bullish hedge fund positions were cut by 2 recently. Our calculations also showed that RC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). RC was in 4 hedge funds’ portfolios at the end of the third quarter of 2019. There were 6 hedge funds in our database with RC holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a peek at the recent hedge fund action surrounding Ready Capital Corporation (NYSE:RC).
How are hedge funds trading Ready Capital Corporation (NYSE:RC)?
At Q3’s end, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from one quarter earlier. On the other hand, there were a total of 4 hedge funds with a bullish position in RC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Farallon Capital, holds the number one position in Ready Capital Corporation (NYSE:RC). Farallon Capital has a $35.1 million position in the stock, comprising 0.4% of its 13F portfolio. On Farallon Capital’s heels is Winton Capital Management, managed by David Harding, which holds a $4.8 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish include John Overdeck and David Siegel’s Two Sigma Advisors, Renaissance Technologies and . In terms of the portfolio weights assigned to each position Farallon Capital allocated the biggest weight to Ready Capital Corporation (NYSE:RC), around 0.36% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, setting aside 0.06 percent of its 13F equity portfolio to RC.
Due to the fact that Ready Capital Corporation (NYSE:RC) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of funds that slashed their entire stakes by the end of the third quarter. Intriguingly, Andrew Weiss’s Weiss Asset Management sold off the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising about $7.1 million in stock, and Ron Mass’s Almitas Capital was right behind this move, as the fund sold off about $2.6 million worth. These moves are important to note, as total hedge fund interest fell by 2 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Ready Capital Corporation (NYSE:RC) but similarly valued. These stocks are Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), Universal Electronics Inc (NASDAQ:UEIC), Retail Value Inc. (NYSE:RVI), and Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA). This group of stocks’ market valuations resemble RC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VNDA | 18 | 187961 | 0 |
| UEIC | 12 | 30699 | -1 |
| RVI | 16 | 199915 | -1 |
| LTRPA | 25 | 199428 | 4 |
| Average | 17.75 | 154501 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $155 million. That figure was $41 million in RC’s case. Liberty Tripadvisor Holdings Inc (NASDAQ:LTRPA) is the most popular stock in this table. On the other hand Universal Electronics Inc (NASDAQ:UEIC) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Ready Capital Corporation (NYSE:RC) is even less popular than UEIC. Hedge funds dodged a bullet by taking a bearish stance towards RC. 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 RC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); RC investors were disappointed as the stock returned -0.9% 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.
