Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Beacon Roofing Supply, Inc. (NASDAQ:BECN).
Is Beacon Roofing Supply, Inc. (NASDAQ:BECN) a good investment now? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund bets dropped by 2 lately. Our calculations also showed that BECN isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
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 go over the new hedge fund action regarding Beacon Roofing Supply, Inc. (NASDAQ:BECN).
What have hedge funds been doing with Beacon Roofing Supply, Inc. (NASDAQ:BECN)?
At Q2's end, a total of 16 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 BECN over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Iridian Asset Management was the largest shareholder of Beacon Roofing Supply, Inc. (NASDAQ:BECN), with a stake worth $136.3 million reported as of the end of March. Trailing Iridian Asset Management was Adage Capital Management, which amassed a stake valued at $103.4 million. Fisher Asset Management, Rubric Capital Management, and Soapstone Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Since Beacon Roofing Supply, Inc. (NASDAQ:BECN) has witnessed falling interest from hedge fund managers, we can see that there lies a certain "tier" of money managers who were dropping their positions entirely last quarter. It's worth mentioning that John Smith Clark's Southpoint Capital Advisors cut the biggest position of all the hedgies monitored by Insider Monkey, comprising about $22.5 million in stock. Israel Englander's fund, Millennium Management, also said goodbye to its stock, about $5.3 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let's also examine hedge fund activity in other stocks similar to Beacon Roofing Supply, Inc. (NASDAQ:BECN). These stocks are Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), Alarm.com Holdings, Inc. (NASDAQ:ALRM), Retail Properties of America Inc (NYSE:RPAI), and Red Rock Resorts, Inc. (NASDAQ:RRR). All of these stocks' market caps resemble BECN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KTOS,18,100760,1 ALRM,19,191648,3 RPAI,14,241189,-2 RRR,16,317709,-1 Average,16.75,212827,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $400 million in BECN's case. Alarm.com Holdings, Inc. (NASDAQ:ALRM) is the most popular stock in this table. On the other hand Retail Properties of America Inc (NYSE:RPAI) is the least popular one with only 14 bullish hedge fund positions. Beacon Roofing Supply, Inc. (NASDAQ:BECN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately BECN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BECN investors were disappointed as the stock returned -8.7% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.