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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Regal Beloit Corporation (NYSE:RBC) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Regal Beloit Corporation (NYSE:RBC) shareholders have witnessed a decrease in enthusiasm from smart money lately. Our calculations also showed that RBC 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.
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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.
Sander Gerber of Hudson Bay Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let's check out the latest hedge fund action surrounding Regal Beloit Corporation (NYSE:RBC).
Hedge fund activity in Regal Beloit Corporation (NYSE:RBC)
At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in RBC over the last 18 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Regal Beloit Corporation (NYSE:RBC), with a stake worth $64.7 million reported as of the end of September. Trailing AQR Capital Management was Citadel Investment Group, which amassed a stake valued at $52.6 million. Fisher Asset Management, Arrowstreet Capital, and Marshall Wace LLP 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 Prospector Partners allocated the biggest weight to Regal Beloit Corporation (NYSE:RBC), around 0.55% of its 13F portfolio. Interval Partners is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to RBC.
Judging by the fact that Regal Beloit Corporation (NYSE:RBC) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of funds that decided to sell off their full holdings last quarter. Intriguingly, Israel Englander's Millennium Management said goodbye to the biggest stake of the "upper crust" of funds watched by Insider Monkey, comprising close to $23.9 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund dumped about $1.2 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 5 funds last quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Regal Beloit Corporation (NYSE:RBC) but similarly valued. These stocks are Freshpet Inc (NASDAQ:FRPT), Taubman Centers, Inc. (NYSE:TCO), Gildan Activewear Inc (NYSE:GIL), and Brighthouse Financial, Inc. (NASDAQ:BHF). This group of stocks' market caps match RBC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FRPT,24,141032,4 TCO,38,478517,12 GIL,22,274827,0 BHF,25,372976,-18 Average,27.25,316838,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $317 million. That figure was $205 million in RBC's case. Taubman Centers, Inc. (NYSE:TCO) is the most popular stock in this table. On the other hand Gildan Activewear Inc (NYSE:GIL) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Regal Beloit Corporation (NYSE:RBC) is even less popular than GIL. Hedge funds clearly dropped the ball on RBC as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on RBC as the stock returned 49.1% since the end of March and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.