Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Escalade, Incorporated (NASDAQ:ESCA).
Hedge fund interest in Escalade, Incorporated (NASDAQ:ESCA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ESCA to other stocks including FNCB Bancorp Inc. (NASDAQ:FNCB), CannTrust Holdings Inc. (NYSE:CTST), and X4 Pharmaceuticals, Inc. (NASDAQ:XFOR) to get a better sense of its popularity.
Video: Click the image to 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’ 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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the new hedge fund action encompassing Escalade, Incorporated (NASDAQ:ESCA).
Hedge fund activity in Escalade, Incorporated (NASDAQ:ESCA)
At the end of the third quarter, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ESCA over the last 17 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Beddow Capital Management was the largest shareholder of Escalade, Incorporated (NASDAQ:ESCA), with a stake worth $4.8 million reported as of the end of September. Trailing Beddow Capital Management was Minerva Advisors, which amassed a stake valued at $4.6 million. Renaissance Technologies was 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 Beddow Capital Management allocated the biggest weight to Escalade, Incorporated (NASDAQ:ESCA), around 3.03% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, dishing out 2.53 percent of its 13F equity portfolio to ESCA.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Escalade, Incorporated (NASDAQ:ESCA) but similarly valued. These stocks are FNCB Bancorp Inc. (NASDAQ:FNCB), CannTrust Holdings Inc. (NYSE:CTST), X4 Pharmaceuticals, Inc. (NASDAQ:XFOR), and Medallion Financial Corp. (NASDAQ:MFIN). This group of stocks’ market values are similar to ESCA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FNCB | 3 | 457 | 2 |
| CTST | 5 | 715 | -7 |
| XFOR | 6 | 46291 | 0 |
| MFIN | 7 | 3771 | 1 |
| Average | 5.25 | 12809 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.25 hedge funds with bullish positions and the average amount invested in these stocks was $13 million. That figure was $11 million in ESCA’s case. Medallion Financial Corp. (NASDAQ:MFIN) is the most popular stock in this table. On the other hand FNCB Bancorp Inc. (NASDAQ:FNCB) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Escalade, Incorporated (NASDAQ:ESCA) is even less popular than FNCB. Hedge funds dodged a bullet by taking a bearish stance towards ESCA. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ESCA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ESCA investors were disappointed as the stock returned 4.2% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
