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Do Hedge Funds Drop The Ball On QAD Inc. (QADA)?

Asma UL Husna

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

QAD Inc. (NASDAQ:QADA) was in 11 hedge funds' portfolios at the end of the second quarter of 2019. QADA shareholders have witnessed a decrease in activity from the world's largest hedge funds lately. There were 16 hedge funds in our database with QADA holdings at the end of the previous quarter. Our calculations also showed that QADA isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

QADA_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to view the fresh hedge fund action surrounding QAD Inc. (NASDAQ:QADA).

How have hedgies been trading QAD Inc. (NASDAQ:QADA)?

At Q2's end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the first quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in QADA a year ago. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

David Atterbury - Whetstone Capital

Among these funds, Nantahala Capital Management held the most valuable stake in QAD Inc. (NASDAQ:QADA), which was worth $48.9 million at the end of the second quarter. On the second spot was Renaissance Technologies which amassed $24.6 million worth of shares. Moreover, Whetstone Capital Advisors, Portolan Capital Management, and Royce & Associates were also bullish on QAD Inc. (NASDAQ:QADA), allocating a large percentage of their portfolios to this stock.

Due to the fact that QAD Inc. (NASDAQ:QADA) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds that decided to sell off their positions entirely by the end of the second quarter. Intriguingly, Ken Griffin's Citadel Investment Group dropped the largest position of the "upper crust" of funds followed by Insider Monkey, comprising an estimated $1 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also dumped its stock, about $0.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds by the end of the second quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as QAD Inc. (NASDAQ:QADA) but similarly valued. We will take a look at US Concrete Inc (NASDAQ:USCR), Berry Petroleum Corporation (NASDAQ:BRY), Forestar Group Inc. (NYSE:FOR), and MacroGenics Inc (NASDAQ:MGNX). This group of stocks' market caps match QADA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position USCR,17,91942,0 BRY,18,192624,2 FOR,4,77243,-3 MGNX,19,115493,-4 Average,14.5,119326,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $119 million. That figure was $113 million in QADA's case. MacroGenics Inc (NASDAQ:MGNX) is the most popular stock in this table. On the other hand Forestar Group Inc. (NYSE:FOR) is the least popular one with only 4 bullish hedge fund positions. QAD Inc. (NASDAQ:QADA) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on QADA as the stock returned 15.2% during the same time frame and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

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