We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds’ top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Reed’s, Inc. (NASDAQ:REED).
Reed’s, Inc. (NASDAQ:REED) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 3 hedge funds’ portfolios at the end of September. 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 Unum Therapeutics Inc. (NASDAQ:UMRX), BK Technologies, Corporation (NYSE:BKTI), and Broadway Financial Corporation (NASDAQ:BYFC) to gather more data points. Our calculations also showed that REED 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 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.
Chuck Royce of Royce & Associates
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to view the latest hedge fund action encompassing Reed’s, Inc. (NASDAQ:REED).
How are hedge funds trading Reed’s, Inc. (NASDAQ:REED)?
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in REED over the last 17 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Chuck Royce’s Royce & Associates has the largest position in Reed’s, Inc. (NASDAQ:REED), worth close to $0.8 million, amounting to less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is GRT Capital Partners, managed by Gregory Fraser, Rudolph Kluiber, and Timothy Krochuk, which holds a $0.1 million position; 0.1% of its 13F portfolio is allocated to the stock. In terms of the portfolio weights assigned to each position GRT Capital Partners allocated the biggest weight to Reed’s, Inc. (NASDAQ:REED), around 0.07% of its portfolio. Ursa Fund Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to REED.
Judging by the fact that Reed’s, Inc. (NASDAQ:REED) has experienced declining sentiment from the smart money, it’s easy to see that there exists a select few hedge funds that slashed their full holdings in the third quarter. Interestingly, Renaissance Technologies sold off the largest stake of all the hedgies watched by Insider Monkey, valued at about $0.4 million in stock, and Jack Ripsteen’s Potrero Capital Research was right behind this move, as the fund cut about $0.3 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Reed’s, Inc. (NASDAQ:REED) but similarly valued. These stocks are Unum Therapeutics Inc. (NASDAQ:UMRX), BK Technologies, Corporation (NYSE:BKTI), Broadway Financial Corporation (NASDAQ:BYFC), and Kewaunee Scientific Corporation (NASDAQ:KEQU). This group of stocks’ market valuations match REED’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| UMRX | 4 | 2657 | -1 |
| BKTI | 1 | 2137 | 0 |
| BYFC | 1 | 32 | 0 |
| KEQU | 2 | 1777 | 1 |
| Average | 2 | 1651 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 2 hedge funds with bullish positions and the average amount invested in these stocks was $2 million. That figure was $1 million in REED’s case. Unum Therapeutics Inc. (NASDAQ:UMRX) is the most popular stock in this table. On the other hand BK Technologies, Corporation (NYSE:BKTI) is the least popular one with only 1 bullish hedge fund positions. Reed’s, Inc. (NASDAQ:REED) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately REED wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on REED were disappointed as the stock returned -46.2% during the fourth quarter (through 11/22) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.