Were Hedge Funds Wrong About Crowding Into RealPage, Inc. (RP)?

In this article we are going to use hedge fund sentiment as a tool and determine whether RealPage, Inc. (NASDAQ:RP) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is RealPage, Inc. (NASDAQ:RP) a bargain? Money managers were turning bullish. The number of bullish hedge fund positions went up by 10 lately. RealPage, Inc. (NASDAQ:RP) was in 39 hedge funds’ portfolios at the end of June. The all time high for this statistics is 36. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that RP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a gander at the recent hedge fund action regarding RealPage, Inc. (NASDAQ:RP).

How are hedge funds trading RealPage, Inc. (NASDAQ:RP)?

At Q2’s end, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 34% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in RP over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Eminence Capital was the largest shareholder of RealPage, Inc. (NASDAQ:RP), with a stake worth $210.5 million reported as of the end of June. Trailing Eminence Capital was Stockbridge Partners, which amassed a stake valued at $157.2 million. Echo Street Capital Management, Citadel Investment Group, and RGM 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 Banbury Partners allocated the biggest weight to RealPage, Inc. (NASDAQ:RP), around 8.07% of its 13F portfolio. Stockbridge Partners is also relatively very bullish on the stock, designating 4.93 percent of its 13F equity portfolio to RP.

As one would reasonably expect, some big names have jumped into RealPage, Inc. (NASDAQ:RP) headfirst. Millennium Management, managed by Israel Englander, established the most valuable position in RealPage, Inc. (NASDAQ:RP). Millennium Management had $13.5 million invested in the company at the end of the quarter. Doug Silverman and Alexander Klabin’s Senator Investment Group also made a $5.2 million investment in the stock during the quarter. The following funds were also among the new RP investors: Renaissance Technologies, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Matthew L Pinz’s Pinz Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as RealPage, Inc. (NASDAQ:RP) but similarly valued. These stocks are Commerce Bancshares, Inc. (NASDAQ:CBSH), Dolby Laboratories, Inc. (NYSE:DLB), UGI Corp (NYSE:UGI), Diamondback Energy Inc (NASDAQ:FANG), Carlisle Companies, Inc. (NYSE:CSL), The Boston Beer Company Inc (NYSE:SAM), and Lear Corporation (NYSE:LEA). All of these stocks’ market caps are closest to RP’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $415 million. That figure was $740 million in RP’s case. Lear Corporation (NYSE:LEA) is the most popular stock in this table. On the other hand Commerce Bancshares, Inc. (NASDAQ:CBSH) is the least popular one with only 16 bullish hedge fund positions. RealPage, Inc. (NASDAQ:RP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RP is 86. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately RP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RP were disappointed as the stock returned -14.3% since the end of June (through 10/30) 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 many of these stocks already outperformed the market so far this year.

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