LF Capital Acquistion Corp. (LFAC): Are Hedge Funds Right About This Stock?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of LF Capital Acquistion Corp. (NASDAQ:LFAC).

Is LF Capital Acquistion Corp. (NASDAQ:LFAC) the right pick for your portfolio? The smart money is in a pessimistic mood. The number of long hedge fund positions were cut by 1 recently. Our calculations also showed that LFAC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LFAC was in 8 hedge funds’ portfolios at the end of the first quarter of 2020. There were 9 hedge funds in our database with LFAC holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Paul Glazer of Glazer Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a peek at the recent hedge fund action surrounding LF Capital Acquistion Corp. (NASDAQ:LFAC).

How are hedge funds trading LF Capital Acquistion Corp. (NASDAQ:LFAC)?

At the end of the first quarter, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LFAC over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Glazer Capital was the largest shareholder of LF Capital Acquistion Corp. (NASDAQ:LFAC), with a stake worth $19.5 million reported as of the end of September. Trailing Glazer Capital was Millennium Management, which amassed a stake valued at $5.6 million. Bulldog Investors, Empyrean Capital Partners, and BlueCrest Capital Mgmt. were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Glazer Capital allocated the biggest weight to LF Capital Acquistion Corp. (NASDAQ:LFAC), around 1.3% of its 13F portfolio. Bulldog Investors is also relatively very bullish on the stock, dishing out 1.1 percent of its 13F equity portfolio to LFAC.

Since LF Capital Acquistion Corp. (NASDAQ:LFAC) has faced a decline in interest from the smart money, it’s safe to say that there was a specific group of funds who sold off their full holdings by the end of the first quarter. It’s worth mentioning that John Thiessen’s Vertex One Asset Management dumped the largest investment of all the hedgies followed by Insider Monkey, comprising close to $2.8 million in stock. Phillip Goldstein, Andrew Dakos and Steven Samuels’s fund, Bulldog Investors, also dumped its stock, about $0.3 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as LF Capital Acquistion Corp. (NASDAQ:LFAC) but similarly valued. These stocks are National Bankshares Inc. (NASDAQ:NKSH), Target Hospitality Corp. (NASDAQ:TH), Protective Insurance Corporation (NASDAQ:PTVCA), and Ryerson Holding Corporation (NYSE:RYI). This group of stocks’ market valuations are similar to LFAC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $10 million. That figure was $30 million in LFAC’s case. Target Hospitality Corp. (NASDAQ:TH) is the most popular stock in this table. On the other hand National Bankshares Inc. (NASDAQ:NKSH) is the least popular one with only 2 bullish hedge fund positions. LF Capital Acquistion Corp. (NASDAQ:LFAC) 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.2% in 2020 through June 17th and surpassed the market by 14.8 percentage points. Unfortunately LFAC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); LFAC investors were disappointed as the stock returned 4.3% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.