"October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being '08 and the Crash of '87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the '87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March '09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher." This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.
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 32 percentage points since May 2014 through March 12, 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 analyze the latest hedge fund action surrounding Insteel Industries Inc (NASDAQ:IIIN).
What have hedge funds been doing with Insteel Industries Inc (NASDAQ:IIIN)?
At the end of the fourth quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 5 hedge funds with a bullish position in IIIN a year ago. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Insteel Industries Inc (NASDAQ:IIIN), with a stake worth $29 million reported as of the end of December. Trailing Royce & Associates was AQR Capital Management, which amassed a stake valued at $6.7 million. Citadel Investment Group, AlphaOne Capital Partners, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Insteel Industries Inc (NASDAQ:IIIN) has faced a decline in interest from the aggregate hedge fund industry, we can see that there were a few hedge funds that decided to sell off their full holdings by the end of the third quarter. Intriguingly, Joel Greenblatt's Gotham Asset Management cut the biggest investment of the "upper crust" of funds watched by Insider Monkey, valued at close to $0.8 million in stock. Peter Algert and Kevin Coldiron's fund, Algert Coldiron Investors, also cut its stock, about $0.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 4 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Insteel Industries Inc (NASDAQ:IIIN) but similarly valued. We will take a look at MYR Group Inc (NASDAQ:MYRG), HCI Group, Inc. (NYSE:HCI), Osiris Therapeutics, Inc. (NASDAQ:OSIR), and Caesarstone Ltd. (NASDAQ:CSTE). This group of stocks' market caps match IIIN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MYRG,12,17972,1 HCI,9,29871,2 OSIR,8,11044,4 CSTE,6,15251,3 Average,8.75,18535,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $59 million in IIIN's case. MYR Group Inc (NASDAQ:MYRG) is the most popular stock in this table. On the other hand Caesarstone Ltd. (NASDAQ:CSTE) is the least popular one with only 6 bullish hedge fund positions. Insteel Industries Inc (NASDAQ:IIIN) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately IIIN wasn't nearly as popular as these 15 stock and hedge funds that were betting on IIIN were disappointed as the stock returned -23.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.