Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 9 percentage points since the end of the third quarter of 2018 as investors worried over the possible ramifications of rising interest rates and escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of On Deck Capital Inc (NYSE:ONDK) and see how the stock is affected by the recent hedge fund activity.
On Deck Capital Inc (NYSE:ONDK) has experienced a decrease in activity from the world's largest hedge funds of late. ONDK was in 19 hedge funds' portfolios at the end of March. There were 20 hedge funds in our database with ONDK positions at the end of the previous quarter. Our calculations also showed that ondk 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.
We're going to go over the fresh hedge fund action regarding On Deck Capital Inc (NYSE:ONDK).
What does the smart money think about On Deck Capital Inc (NYSE:ONDK)?
At Q1's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards ONDK over the last 15 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
More specifically, Nantahala Capital Management was the largest shareholder of On Deck Capital Inc (NYSE:ONDK), with a stake worth $28 million reported as of the end of March. Trailing Nantahala Capital Management was Renaissance Technologies, which amassed a stake valued at $24.4 million. 683 Capital Partners, Portolan Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that On Deck Capital Inc (NYSE:ONDK) has faced a decline in interest from the aggregate hedge fund industry, it's easy to see that there were a few fund managers who sold off their entire stakes heading into Q3. It's worth mentioning that David Brown's Hawk Ridge Management dropped the largest stake of the "upper crust" of funds watched by Insider Monkey, comprising about $10.6 million in stock. Josh Goldberg's fund, G2 Investment Partners Management, also dumped its stock, about $0.6 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 1 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to On Deck Capital Inc (NYSE:ONDK). We will take a look at Magic Software Enterprises Ltd. (NASDAQ:MGIC), Willdan Group, Inc. (NASDAQ:WLDN), CRA International, Inc. (NASDAQ:CRAI), and Health Insurance Innovations Inc (NASDAQ:HIIQ). This group of stocks' market valuations match ONDK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGIC,2,3866,-1 WLDN,6,12381,1 CRAI,15,61369,2 HIIQ,22,154293,4 Average,11.25,57977,1.5 [/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 $58 million. That figure was $96 million in ONDK's case. Health Insurance Innovations Inc (NASDAQ:HIIQ) is the most popular stock in this table. On the other hand Magic Software Enterprises Ltd. (NASDAQ:MGIC) is the least popular one with only 2 bullish hedge fund positions. On Deck Capital Inc (NYSE:ONDK) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately ONDK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ONDK were disappointed as the stock returned -20.1% during the same period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.