Is Red Lion Hotels Corporation (RLH) A Good Stock To Buy?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry! This is not an ad, but let’s take a brief look at what statistics has to say about hedge funds’ stock picking abilities. The Standard and Poor’s 500 Index returned approximately 5.2% in the 12 months ending October 30, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a ‘winner’ by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of September 2014) generated a return of 9.5% during the same 12-month period, while 63% of these stock picks outperformed the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 16-year period indicates that hedge funds’ 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 in a stock like Red Lion Hotels Corporation (NYSE:RLH).

Is Red Lion Hotels Corporation (NYSE:RLH) a bargain? Prominent investors are selling. The number of long hedge fund positions fell by 1 in recent months. At the end of this article we will also compare RLH to other stocks including Newtek Business Services, Inc (NASDAQ:NEWT), Corium International Inc (NASDAQ:CORI), and Townsquare Media Inc (NYSE:TSQ) to get a better sense of its popularity.

To most stock holders, hedge funds are assumed to be unimportant, old investment tools of yesteryear. While there are more than 8000 funds trading at the moment, our experts hone in on the aristocrats of this group, around 700 funds. Most estimates calculate that this group of people handle most of all hedge funds’ total asset base, and by paying attention to their highest performing equity investments, Insider Monkey has discovered several investment strategies that have historically surpassed the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy outperformed the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Now, we’re going to review the new action surrounding Red Lion Hotels Corporation (NYSE:RLH).

How have hedgies been trading Red Lion Hotels Corporation (NYSE:RLH)?

Heading into Q4, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Manatuck Hill Partners, managed by Mark Broach, holds the most valuable position in Red Lion Hotels Corporation (NYSE:RLH). Manatuck Hill Partners has a $6.7 million position in the stock, comprising 2.9% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, led by Jim Simons, holding a $2.4 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions consist of Mark N. Diker’s Diker Management, Ken Griffin’s Citadel Investment Group and Matthew Hulsizer’s PEAK6 Capital Management.

We view hedge fund activity in the stock unfavorable, but, in this case, there was only a single hedge fund selling its entire position: Nantahala 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 700+ hedge funds tracked by Insider Monkey identified RLH 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 Red Lion Hotels Corporation (NYSE:RLH) but similarly valued. We will take a look at Newtek Business Services, Inc (NASDAQ:NEWT), Corium International Inc (NASDAQ:CORI), Townsquare Media Inc (NYSE:TSQ), and Dicerna Pharmaceuticals Inc (NASDAQ:DRNA). All of these stocks’ market caps are closest to RLH’s market cap.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $10 million in RLH’s case. Townsquare Media Inc (NYSE:TSQ) is the most popular stock in this table, whereas Newtek Business Services, Inc (NASDAQ:NEWT) is the least popular one with only 4 bullish hedge fund positions. In comparison, with 5 bullish hedge fund positions Red Lion Hotels Corporation (NYSE: RHL) is not the least popular, but next to it, which indicates a hedge fund interest below average. This may imply that Red Lion Hotels Corporation (NYSE:RHL) is not a good stock to buy, therefore we’d rather spend our time researching stocks that hedge funds are piling on. In this particular case, a better choice for investment might be Townsquare Media Inc (NYSE:TSQ).