Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility and underperformance. The time period between the end of June 2015 and the end of June 2016 was one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have been underperforming the large-cap indices. However, things have dramatically changed over the last 5 months. Small-cap stocks reversed their misfortune and beat the large cap indices by almost 11 percentage points since the end of June. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Royal Bank of Canada (NYSE:RY).
Royal Bank of Canada (NYSE:RY) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of the third quarter of 2016, same as at the end of the second quarter. 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 Ambev SA (ADR) (NYSE:ABEV), China Petroleum & Chemical Corp (ADR) (NYSE:SNP), and Eli Lilly & Co. (NYSE:LLY) to gather more data points.
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We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year, involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs.
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What does the smart money think about Royal Bank of Canada (NYSE:RY)?
Heading into the fourth quarter of 2016, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, unchanged from the previous quarter. 17 hedge funds held shares or bullish call options in RY heading into this year as well, so sentiment is flat in 2016. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Tetrem Capital Management, led by Daniel Bubis, holds the largest position in Royal Bank of Canada (NYSE:RY). Tetrem Capital Management has a $186.6 million position in the stock, comprising 7% of its 13F portfolio. Sitting at the No. 2 spot is Jim Simons of Renaissance Technologies, with an $88.6 million position. Other hedge funds and institutional investors with similar optimism encompass Ken Griffin’s Citadel Investment Group, Cliff Asness’ AQR Capital Management, and John Overdeck and David Siegel’s Two Sigma Advisors. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.
Due to the fact that Royal Bank of Canada (NYSE:RY) has faced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of fund managers that elected to cut their full holdings heading into Q4. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest stake of all the hedgies followed by Insider Monkey, totaling about $6.6 million in stock. Citadel Investment Group also dropped its call options, about $2.4 million worth, while retaining its long position.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Royal Bank of Canada (NYSE:RY) but similarly valued. We will take a look at Ambev SA (ADR) (NYSE:ABEV), China Petroleum & Chemical Corp (ADR) (NYSE:SNP), Eli Lilly & Co. (NYSE:LLY), and United Technologies Corporation (NYSE:UTX). This group of stocks’ market valuations are similar to RY’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ABEV | 17 | 422804 | -4 |
| SNP | 11 | 41406 | 2 |
| LLY | 55 | 2889477 | 6 |
| UTX | 48 | 3552166 | -8 |
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1.73 billion. That figure was $456 million in RY’s case. Eli Lilly & Co. (NYSE:LLY) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (ADR) (NYSE:SNP) is the least popular one with only 11 bullish hedge fund positions. Royal Bank of Canada (NYSE:RY) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard LLY might be a better candidate to consider taking a long position in.
Disclosure: None
