Were These Hedge Funds Right About Selling Revlon Inc (REV)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Revlon Inc (NYSE:REV)? The smart money sentiment can provide an answer to this question.

Is Revlon Inc (NYSE:REV) the right investment to pursue these days? Hedge funds were becoming less confident. The number of bullish hedge fund positions shrunk by 2 recently. Revlon Inc (NYSE:REV) was in 34 hedge funds’ portfolios at the end of June. The all time high for this statistics is 38. Our calculations also showed that REV 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.

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 S&P 500 ETFs by 58 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.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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 let’s view the latest hedge fund action encompassing Revlon Inc (NYSE:REV).

Hedge fund activity in Revlon Inc (NYSE:REV)

At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. On the other hand, there were a total of 31 hedge funds with a bullish position in REV a year ago. 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, SCW Capital Management was the largest shareholder of Revlon Inc (NYSE:REV), with a stake worth $39.7 million reported as of the end of June. Trailing SCW Capital Management was Sunriver Management, which amassed a stake valued at $37.6 million. Pzena Investment Management, Sectoral Asset Management, and Royce & Associates 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 SCW Capital Management allocated the biggest weight to Revlon Inc (NYSE:REV), around 25.35% of its 13F portfolio. Litespeed Management is also relatively very bullish on the stock, setting aside 22.57 percent of its 13F equity portfolio to REV.

Seeing as Revlon Inc (NYSE:REV) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedge funds that slashed their full holdings last quarter. Interestingly, Peter S. Park’s Park West Asset Management dropped the biggest stake of the “upper crust” of funds followed by Insider Monkey, comprising close to $7.5 million in stock, and Vishal Saluja and Pham Quang’s Endurant Capital Management was right behind this move, as the fund dropped about $4.4 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Revlon Inc (NYSE:REV) but similarly valued. These stocks are Ranpak Holdings Corp (NYSE:PACK), Controladora Vuela Co Avcn SA CV (NYSE:VLRS), ADTRAN, Inc. (NASDAQ:ADTN), CBTX, Inc. (NASDAQ:CBTX), NexTier Oilfield Solutions Inc. (NYSE:NEX), Viking Therapeutics, Inc. (NASDAQ:VKTX), and 111, Inc. (NASDAQ:YI). All of these stocks’ market caps resemble REV’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.3 hedge funds with bullish positions and the average amount invested in these stocks was $92 million. That figure was $242 million in REV’s case. NexTier Oilfield Solutions Inc. (NYSE:NEX) is the most popular stock in this table. On the other hand 111, Inc. (NASDAQ:YI) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Revlon Inc (NYSE:REV) is more popular among hedge funds. Our overall hedge fund sentiment score for REV is 79.8. 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. 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 still beat the market by 20.1 percentage points. Unfortunately REV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on REV were disappointed as the stock returned -58.6% since the end of the second quarter (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 most of these stocks already outperformed the market in 2020.

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