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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Caesarstone Ltd (NASDAQ:CSTE) and determine whether hedge funds had an edge regarding this stock.
Caesarstone Ltd (NASDAQ:CSTE) has seen an increase in enthusiasm from smart money lately. Our calculations also showed that CSTE isn't among the 30 most popular stocks among hedge funds (click for Q1 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a look at the recent hedge fund action encompassing Caesarstone Ltd (NASDAQ:CSTE).
What does smart money think about Caesarstone Ltd (NASDAQ:CSTE)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the fourth quarter of 2019. By comparison, 6 hedge funds held shares or bullish call options in CSTE a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Caesarstone Ltd (NASDAQ:CSTE) was held by Renaissance Technologies, which reported holding $4 million worth of stock at the end of September. It was followed by Millennium Management with a $3.6 million position. Other investors bullish on the company included Arrowstreet Capital, D E Shaw, and PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Invenomic Capital Management allocated the biggest weight to Caesarstone Ltd (NASDAQ:CSTE), around 0.24% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to CSTE.
Consequently, key money managers have been driving this bullishness. PEAK6 Capital Management, managed by Matthew Hulsizer, initiated the most valuable position in Caesarstone Ltd (NASDAQ:CSTE). PEAK6 Capital Management had $0.9 million invested in the company at the end of the quarter. Ali Motamed's Invenomic Capital Management also initiated a $0.3 million position during the quarter. The only other fund with a new position in the stock is Greg Eisner's Engineers Gate Manager.
Let's now review hedge fund activity in other stocks similar to Caesarstone Ltd (NASDAQ:CSTE). These stocks are Zynex, Inc. (NASDAQ:ZYXI), Crawford & Company (NYSE:CRD), WisdomTree Investments, Inc. (NASDAQ:WETF), and Kosmos Energy Ltd (NYSE:KOS). This group of stocks' market caps are closest to CSTE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZYXI,7,8332,0 CRD,10,49389,0 WETF,20,38214,3 KOS,21,28495,-9 Average,14.5,31108,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $15 million in CSTE's case. Kosmos Energy Ltd (NYSE:KOS) is the most popular stock in this table. On the other hand Zynex, Inc. (NASDAQ:ZYXI) is the least popular one with only 7 bullish hedge fund positions. Caesarstone Ltd (NASDAQ:CSTE) 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 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately CSTE wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CSTE investors were disappointed as the stock returned 12.1% during the second quarter 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.
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Disclosure: None. This article was originally published at Insider Monkey.