Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Hedge fund interest in Regional Management Corp (NYSE:RM) 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 RM to other stocks including Consolidated-Tomoka Land Co. (NYSEAMERICAN:CTO), DSP Group, Inc. (NASDAQ:DSPG), and PolyMet Mining Corp. (NYSEAMERICAN:PLM) 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.
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 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.
Matthew Lindenbaum of Basswood Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the key hedge fund action surrounding Regional Management Corp (NYSE:RM).
How are hedge funds trading Regional Management Corp (NYSE:RM)?
At the end of the third quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RM over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Basswood Capital was the largest shareholder of Regional Management Corp (NYSE:RM), with a stake worth $40.3 million reported as of the end of September. Trailing Basswood Capital was Renaissance Technologies, which amassed a stake valued at $15.2 million. Millennium Management, Arrowstreet Capital, and Cloverdale Capital Management 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 Basswood Capital allocated the biggest weight to Regional Management Corp (NYSE:RM), around 2.95% of its 13F portfolio. Cloverdale Capital Management is also relatively very bullish on the stock, designating 2.86 percent of its 13F equity portfolio to RM.
Judging by the fact that Regional Management Corp (NYSE:RM) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of hedgies that elected to cut their positions entirely in the third quarter. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace said goodbye to the biggest position of all the hedgies watched by Insider Monkey, valued at about $1 million in stock. Paul Tudor Jones’s fund, Tudor Investment Corp, also said goodbye to its stock, about $0.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to Regional Management Corp (NYSE:RM). These stocks are Consolidated-Tomoka Land Co. (NYSEAMERICAN:CTO), DSP Group, Inc. (NASDAQ:DSPG), PolyMet Mining Corp. (NYSEAMERICAN:PLM), and NVE Corporation (NASDAQ:NVEC). This group of stocks’ market valuations resemble RM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CTO | 12 | 46392 | 2 |
| DSPG | 16 | 53003 | 1 |
| PLM | 2 | 463 | -1 |
| NVEC | 11 | 24069 | 4 |
| Average | 10.25 | 30982 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $80 million in RM’s case. DSP Group, Inc. (NASDAQ:DSPG) is the most popular stock in this table. On the other hand PolyMet Mining Corp. (NYSEAMERICAN:PLM) is the least popular one with only 2 bullish hedge fund positions. Regional Management Corp (NYSE:RM) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on RM as the stock returned 15.4% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
