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 Turtle Beach Corp (NASDAQ:HEAR) and find out how it is affected by hedge funds' moves.
Turtle Beach Corp (NASDAQ:HEAR) shareholders have witnessed a decrease in hedge fund interest of late. Our calculations also showed that HEAR 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.
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_88925" align="aligncenter" width="450"] Bill Miller of Miller Value Partners[/caption]
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. We're going to analyze the new hedge fund action surrounding Turtle Beach Corp (NASDAQ:HEAR).
How have hedgies been trading Turtle Beach Corp (NASDAQ:HEAR)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HEAR over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Manatuck Hill Partners was the largest shareholder of Turtle Beach Corp (NASDAQ:HEAR), with a stake worth $3.6 million reported as of the end of September. Trailing Manatuck Hill Partners was AWH Capital, which amassed a stake valued at $2.8 million. Royce & Associates, AQR Capital Management, and Maverick 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 AWH Capital allocated the biggest weight to Turtle Beach Corp (NASDAQ:HEAR), around 3.5% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, setting aside 2 percent of its 13F equity portfolio to HEAR.
Since Turtle Beach Corp (NASDAQ:HEAR) has faced falling interest from the aggregate hedge fund industry, logic holds that there exists a select few fund managers that decided to sell off their entire stakes heading into Q4. Intriguingly, Anand Parekh's Alyeska Investment Group dumped the largest position of the "upper crust" of funds tracked by Insider Monkey, valued at about $4 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dumped about $3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 3 funds heading into Q4.
Let's also examine hedge fund activity in other stocks similar to Turtle Beach Corp (NASDAQ:HEAR). We will take a look at American Superconductor Corporation (NASDAQ:AMSC), Riverview Bancorp, Inc. (NASDAQ:RVSB), Pieris Pharmaceuticals, Inc. (NASDAQ:PIRS), and Hill International Inc (NYSE:HIL). This group of stocks' market valuations match HEAR's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMSC,12,27200,1 RVSB,10,6350,2 PIRS,11,38716,-1 HIL,12,49032,2 Average,11.25,30325,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $15 million in HEAR's case. American Superconductor Corporation (NASDAQ:AMSC) is the most popular stock in this table. On the other hand Riverview Bancorp, Inc. (NASDAQ:RVSB) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Turtle Beach Corp (NASDAQ:HEAR) is even less popular than RVSB. Hedge funds dodged a bullet by taking a bearish stance towards HEAR. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately HEAR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); HEAR investors were disappointed as the stock returned -28.5% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.