Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Hedge fund interest in RH (NYSE:RH) shares was flat at the end of last quarter. This is usually a negative indicator. 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 WD-40 Company (NASDAQ:WDFC), Finisar Corporation (NASDAQ:FNSR), and Resideo Technologies, Inc. (NYSE:REZI) to gather more data points.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let’s take a gander at the fresh hedge fund action surrounding RH (NYSE:RH).
How have hedgies been trading RH (NYSE:RH)?
Heading into the first quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards RH over the last 14 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Nantahala Capital Management was the largest shareholder of RH (NYSE:RH), with a stake worth $81.3 million reported as of the end of September. Trailing Nantahala Capital Management was Balyasny Asset Management, which amassed a stake valued at $50.3 million. Maverick Capital, Kingdon Capital, and Wallace Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because RH (NYSE:RH) has experienced a decline in interest from the smart money, we can see that there lies a certain “tier” of money managers that slashed their entire stakes in the third quarter. Interestingly, Alexander Mitchell’s Scopus Asset Management dropped the largest stake of the 700 funds followed by Insider Monkey, comprising an estimated $39.3 million in stock, and Robert Pohly’s Samlyn Capital was right behind this move, as the fund dropped about $39.1 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 now review hedge fund activity in other stocks – not necessarily in the same industry as RH (NYSE:RH) but similarly valued. We will take a look at WD-40 Company (NASDAQ:WDFC), Finisar Corporation (NASDAQ:FNSR), Resideo Technologies, Inc. (NYSE:REZI), and Outfront Media Inc (NYSE:OUT). This group of stocks’ market caps are similar to RH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WDFC | 15 | 169856 | 5 |
| FNSR | 13 | 322901 | 0 |
| REZI | 35 | 414766 | 35 |
| OUT | 17 | 234362 | 4 |
| Average | 20 | 285471 | 11 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $285 million. That figure was $221 million in RH’s case. Resideo Technologies, Inc. (NYSE:REZI) is the most popular stock in this table. On the other hand Finisar Corporation (NASDAQ:FNSR) is the least popular one with only 13 bullish hedge fund positions. RH (NYSE:RH) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately RH wasn’t nearly as popular as these 15 stock and hedge funds that were betting on RH were disappointed as the stock returned -13.8% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
