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Hedge Funds Dropped The Ball On Communications Systems, Inc. (JCS)

Abigail Fisher

With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was Communications Systems, Inc. (NASDAQ:JCS).

Communications Systems, Inc. (NASDAQ:JCS) shareholders have witnessed a decrease in hedge fund interest recently. JCS was in 2 hedge funds' portfolios at the end of the third quarter of 2019. There were 3 hedge funds in our database with JCS holdings at the end of the previous quarter. Our calculations also showed that JCS 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]

Mario Gabelli of GAMCO Investors

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the key hedge fund action regarding Communications Systems, Inc. (NASDAQ:JCS).

What have hedge funds been doing with Communications Systems, Inc. (NASDAQ:JCS)?

At the end of the third quarter, a total of 2 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards JCS over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

JCS_nov2019

Among these funds, GAMCO Investors held the most valuable stake in Communications Systems, Inc. (NASDAQ:JCS), which was worth $3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $2.6 million worth of shares.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Ancora Advisors. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified JCS as a viable investment and initiated a position in the stock.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Communications Systems, Inc. (NASDAQ:JCS) but similarly valued. We will take a look at Adamis Pharmaceuticals Corporation (NASDAQ:ADMP), Proteostasis Therapeutics, Inc. (NASDAQ:PTI), Francesca's Holdings Corp (NASDAQ:FRAN), and iMedia Brands, Inc. (NASDAQ:IMBI). All of these stocks' market caps are similar to JCS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADMP,4,1545,2 PTI,7,3518,0 FRAN,8,6199,0 IMBI,4,2312,1 Average,5.75,3394,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $3 million. That figure was $6 million in JCS's case. Francesca's Holdings Corp (NASDAQ:FRAN) is the most popular stock in this table. On the other hand Adamis Pharmaceuticals Corporation (NASDAQ:ADMP) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Communications Systems, Inc. (NASDAQ:JCS) is even less popular than ADMP. Hedge funds clearly dropped the ball on JCS as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. A small number of hedge funds were also right about betting on JCS as the stock returned 52.3% during the fourth quarter (through 11/22) and outperformed the market by an even larger margin.

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

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