World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.
Cubic Corporation (NYSE:CUB) was in 15 hedge funds' portfolios at the end of March. CUB has experienced a decrease in hedge fund interest in recent months. There were 22 hedge funds in our database with CUB positions at the end of the previous quarter. Our calculations also showed that cub isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let's take a look at the key hedge fund action encompassing Cubic Corporation (NYSE:CUB).
How are hedge funds trading Cubic Corporation (NYSE:CUB)?
At Q1's end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -32% from the fourth quarter of 2018. By comparison, 11 hedge funds held shares or bullish call options in CUB a year ago. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Daruma Asset Management, managed by Mariko Gordon, holds the most valuable position in Cubic Corporation (NYSE:CUB). Daruma Asset Management has a $30.4 million position in the stock, comprising 3.5% of its 13F portfolio. On Daruma Asset Management's heels is Peter Schliemann of Rutabaga Capital Management, with a $12.5 million position; 3.5% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish encompass Ken Griffin's Citadel Investment Group, Ken Grossman and Glen Schneider's SG Capital Management and Chuck Royce's Royce & Associates.
Seeing as Cubic Corporation (NYSE:CUB) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there were a few funds that slashed their full holdings last quarter. At the top of the heap, Anand Parekh's Alyeska Investment Group dumped the biggest position of the "upper crust" of funds monitored by Insider Monkey, worth an estimated $7.4 million in stock. Benjamin A. Smith's fund, Laurion Capital Management, also cut its stock, about $6.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 7 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Cubic Corporation (NYSE:CUB) but similarly valued. These stocks are Sotheby's (NYSE:BID), Xencor Inc (NASDAQ:XNCR), FGL Holdings (NYSE:FG), and Allakos Inc. (NASDAQ:ALLK). This group of stocks' market valuations are similar to CUB's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BID,18,335777,2 XNCR,16,189739,3 FG,23,183387,-6 ALLK,9,148939,-1 Average,16.5,214461,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $73 million in CUB's case. FGL Holdings (NYSE:FG) is the most popular stock in this table. On the other hand Allakos Inc. (NASDAQ:ALLK) is the least popular one with only 9 bullish hedge fund positions. Cubic Corporation (NYSE:CUB) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on CUB as the stock returned 7.8% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.