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 Rosetta Stone Inc (NYSE:RST)? The smart money sentiment can provide an answer to this question.
Rosetta Stone Inc (NYSE:RST) has seen an increase in hedge fund sentiment lately. RST was in 15 hedge funds' portfolios at the end of the third quarter of 2019. There were 12 hedge funds in our database with RST positions at the end of the previous quarter. Our calculations also showed that RST 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.
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 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.
[caption id="attachment_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the key hedge fund action regarding Rosetta Stone Inc (NYSE:RST).
What does smart money think about Rosetta Stone Inc (NYSE:RST)?
At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in RST a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Rosetta Stone Inc (NYSE:RST), which was worth $28.5 million at the end of the third quarter. On the second spot was Osmium Partners which amassed $21.2 million worth of shares. Ariel Investments, G2 Investment Partners Management, and Two Sigma Advisors 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 Osmium Partners allocated the biggest weight to Rosetta Stone Inc (NYSE:RST), around 26.49% of its 13F portfolio. Empirical Capital Partners is also relatively very bullish on the stock, earmarking 3.71 percent of its 13F equity portfolio to RST.
With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Empirical Capital Partners, managed by Cristan Blackman, assembled the largest position in Rosetta Stone Inc (NYSE:RST). Empirical Capital Partners had $2.7 million invested in the company at the end of the quarter. Minhua Zhang's Weld Capital Management also made a $0.8 million investment in the stock during the quarter. The other funds with new positions in the stock are David Harding's Winton Capital Management, Donald Sussman's Paloma Partners, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Rosetta Stone Inc (NYSE:RST) but similarly valued. These stocks are Equity Bancshares, Inc. (NASDAQ:EQBK), Merus N.V. (NASDAQ:MRUS), Arcus Biosciences, Inc. (NYSE:RCUS), and SIGA Technologies Inc. (NASDAQ:SIGA). This group of stocks' market caps match RST's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQBK,6,41823,1 MRUS,8,139433,1 RCUS,11,52740,-3 SIGA,12,27474,2 Average,9.25,65368,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $80 million in RST's case. SIGA Technologies Inc. (NASDAQ:SIGA) is the most popular stock in this table. On the other hand Equity Bancshares, Inc. (NASDAQ:EQBK) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Rosetta Stone Inc (NYSE:RST) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately RST wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RST were disappointed as the stock returned -10.7% during the first two months of the fourth 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 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.