The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of Vectrus Inc (NYSE:VEC) and find out how it is affected by hedge funds’ moves.
Vectrus Inc (NYSE:VEC) investors should be aware of an increase in hedge fund interest recently. Our calculations also showed that VEC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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’ 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 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 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.
Cliff Asness of AQR Capital Management
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a peek at the latest hedge fund action encompassing Vectrus Inc (NYSE:VEC).
How have hedgies been trading Vectrus Inc (NYSE:VEC)?
At Q3’s end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in VEC 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.
Among these funds, AQR Capital Management held the most valuable stake in Vectrus Inc (NYSE:VEC), which was worth $16.8 million at the end of the third quarter. On the second spot was D E Shaw which amassed $6.3 million worth of shares. GLG Partners, Renaissance Technologies, and Driehaus Capital 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 Factorial Partners allocated the biggest weight to Vectrus Inc (NYSE:VEC), around 1.17% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, setting aside 0.14 percent of its 13F equity portfolio to VEC.
Consequently, specific money managers have jumped into Vectrus Inc (NYSE:VEC) headfirst. Driehaus Capital, managed by Richard Driehaus, initiated the largest position in Vectrus Inc (NYSE:VEC). Driehaus Capital had $4.4 million invested in the company at the end of the quarter. Chuck Royce’s Royce & Associates also initiated a $0.8 million position during the quarter. The other funds with brand new VEC positions are Israel Englander’s Millennium Management and David Harding’s Winton Capital Management.
Let’s check out hedge fund activity in other stocks similar to Vectrus Inc (NYSE:VEC). These stocks are Mechel PAO (NYSE:MTL), Kiniksa Pharmaceuticals, Ltd. (NASDAQ:KNSA), Star Group, L.P. (NYSE:SGU), and Myovant Sciences Ltd. (NYSE:MYOV). This group of stocks’ market values are closest to VEC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MTL | 2 | 1373 | 0 |
| KNSA | 8 | 66257 | -1 |
| SGU | 8 | 81132 | 0 |
| MYOV | 14 | 40493 | 6 |
| Average | 8 | 47314 | 1.25 |
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 $47 million. That figure was $50 million in VEC’s case. Myovant Sciences Ltd. (NYSE:MYOV) is the most popular stock in this table. On the other hand Mechel OAO (NYSE:MTL) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Vectrus Inc (NYSE:VEC) is more popular among hedge funds. 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 VEC as the stock returned 25.3% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
