ReachLocal Inc. (RLOC): Are Hedge Funds Right About This Stock?

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. The time period between June 25 and the end of October was one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 14 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually, their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of ReachLocal Inc. (NASDAQ:RLOC).

ReachLocal Inc. (NASDAQ:RLOC) has seen a decrease in hedge fund interest recently. At the end of this article, we will also compare ReachLocal Inc. (NASDAQ:RLOC) to other stocks, including Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS), Support.com, Inc. (NASDAQ:SPRT), and American Superconductor Corporation (NASDAQ:AMSC) to get a better sense of its popularity.

In the eyes of most shareholders, hedge funds are assumed to be underperforming, old investment vehicles of the past. While there are over 8000 funds trading today, Our researchers look at the elite of this group, around 700 funds. These hedge fund managers handle the bulk of the hedge fund industry’s total capital, and by shadowing their best investments, Insider Monkey has spotted a number of investment strategies that have historically surpassed the broader indices. 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.

Keeping this in mind, let’s go over the new action encompassing ReachLocal Inc. (NASDAQ:RLOC).

How are hedge funds trading ReachLocal Inc. (NASDAQ:RLOC)?

At the end of Q3, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 14% from the previous quarter. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Douglas T. Granat’s Trigran Investments has the biggest position in ReachLocal Inc. (NASDAQ:RLOC), worth close to $6.7 million, amounting to 2.1% of its total 13F portfolio. Coming in second is Renaissance Technologies, holding a $2 million position; less than 0.1% of its 13F portfolio is allocated to the stock. Other professional money managers that hold long positions encompass Steven Boyd’s Armistice Capital, D E Shaw, and Jose Fernandez’s Stepstone Group.

We view hedge fund selling in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: LMR Partners. 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 here because none of the 700+ hedge funds tracked by Insider Monkey identified RLOC as a viable investment and initiated a position in the stock.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as ReachLocal Inc. (NASDAQ:RLOC) but similarly valued. We will take a look at Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS), Support.com, Inc. (NASDAQ:SPRT), American Superconductor Corporation (NASDAQ:AMSC), and Vertex Energy Inc (NASDAQ:VTNR). All of these stocks’ market caps are similar to ReachLocal Inc. (NASDAQ:RLOC)’s market cap.

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 $8 million. That figure was $10 million in ReachLocal Inc. (NASDAQ:RLOC)’s case. Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS) is the most popular stock in this table. On the other hand, American Superconductor Corporation (NASDAQ:AMSC) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks, ReachLocal Inc. (NASDAQ:RLOC) is even less popular than American Superconductor Corporation (NASDAQ:AMSC). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case, more research is warranted.