We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds' top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Alpha Pro Tech, Ltd. (NYSE:APT).
Alpha Pro Tech, Ltd. (NYSE:APT) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 2 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare APT to other stocks including MIND C.T.I. Ltd. (NASDAQ:MNDO), Charles & Colvard, Ltd. (NASDAQ:CTHR), and Ampco-Pittsburgh Corp. (NYSE:AP) to get a better sense of its popularity.
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 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. 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.
[caption id="attachment_27209" align="aligncenter" width="444"] Jim Simons Founder of Renaissance Technologies[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the latest hedge fund action surrounding Alpha Pro Tech, Ltd. (NYSE:APT).
How have hedgies been trading Alpha Pro Tech, Ltd. (NYSE:APT)?
At Q3's end, a total of 2 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in APT over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Alpha Pro Tech, Ltd. (NYSEAMEX:APT), which was worth $3.9 million at the end of the third quarter. On the second spot was Ancora Advisors which amassed $0.5 million worth of shares.
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 review hedge fund activity in other stocks similar to Alpha Pro Tech, Ltd. (NYSE:APT). We will take a look at MIND C.T.I. Ltd. (NASDAQ:MNDO), Charles & Colvard, Ltd. (NASDAQ:CTHR), Ampco-Pittsburgh Corp. (NYSE:AP), and B Communications Ltd (NASDAQ:BCOM). This group of stocks' market values match APT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNDO,2,364,1 CTHR,2,1839,-1 AP,5,8501,0 BCOM,1,77,0 Average,2.5,2695,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 2.5 hedge funds with bullish positions and the average amount invested in these stocks was $3 million. That figure was $4 million in APT's case. Ampco-Pittsburgh Corp. (NYSE:AP) is the most popular stock in this table. On the other hand B Communications Ltd (NASDAQ:BCOM) is the least popular one with only 1 bullish hedge fund positions. Alpha Pro Tech, Ltd. (NYSE:APT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately APT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); APT investors were disappointed as the stock returned -7.8% during the fourth quarter (through 11/22) 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.