We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards RCI Hospitality Holdings, Inc. (NASDAQ:RICK) and determine whether hedge funds skillfully traded this stock.
RCI Hospitality Holdings, Inc. (NASDAQ:RICK) was in 10 hedge funds' portfolios at the end of the first quarter of 2020. RICK has experienced an increase in activity from the world's largest hedge funds in recent months. There were 9 hedge funds in our database with RICK holdings at the end of the previous quarter. Our calculations also showed that RICK 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.
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 S&P 500 ETFs by 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.
[caption id="attachment_746893" align="aligncenter" width="392"] Paul Marshall of Marshall Wace[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let's view the latest hedge fund action encompassing RCI Hospitality Holdings, Inc. (NASDAQ:RICK).
How are hedge funds trading RCI Hospitality Holdings, Inc. (NASDAQ:RICK)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RICK over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in RCI Hospitality Holdings, Inc. (NASDAQ:RICK), which was worth $2.5 million at the end of the third quarter. On the second spot was ADW Capital which amassed $1.7 million worth of shares. Arrowstreet Capital, Millennium Management, 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 ADW Capital allocated the biggest weight to RCI Hospitality Holdings, Inc. (NASDAQ:RICK), around 55.28% of its 13F portfolio. Ellington is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to RICK.
Consequently, specific money managers were leading the bulls' herd. ADW Capital, managed by Adam Wyden, created the most valuable position in RCI Hospitality Holdings, Inc. (NASDAQ:RICK). ADW Capital had $1.7 million invested in the company at the end of the quarter. Chuck Royce's Royce & Associates also initiated a $0.3 million position during the quarter. The only other fund with a brand new RICK position is Mike Vranos's Ellington.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as RCI Hospitality Holdings, Inc. (NASDAQ:RICK) but similarly valued. We will take a look at Alaska Communications Systems Group Inc (NASDAQ:ALSK), Zagg Inc (NASDAQ:ZAGG), Twin Disc, Incorporated (NASDAQ:TWIN), and Clipper Realty Inc. (NYSE:CLPR). This group of stocks' market caps are similar to RICK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALSK,8,5978,3 ZAGG,8,19992,-1 TWIN,5,17069,-2 CLPR,9,21816,1 Average,7.5,16214,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $7 million in RICK's case. Clipper Realty Inc. (NYSE:CLPR) is the most popular stock in this table. On the other hand Twin Disc, Incorporated (NASDAQ:TWIN) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks RCI Hospitality Holdings, Inc. (NASDAQ:RICK) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on RICK as the stock returned 39.3% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.