It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Ceragon Networks Ltd. (NASDAQ:CRNT).
Ceragon Networks Ltd. (NASDAQ:CRNT) was in 3 hedge funds' portfolios at the end of the third quarter of 2019. CRNT has seen a decrease in activity from the world's largest hedge funds of late. There were 4 hedge funds in our database with CRNT positions at the end of the previous quarter. Our calculations also showed that CRNT isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to 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 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.
[caption id="attachment_26340" align="aligncenter" width="467"] Ken Griffin of Citadel Investment Group[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's check out the fresh hedge fund action surrounding Ceragon Networks Ltd. (NASDAQ:CRNT).
What does smart money think about Ceragon Networks Ltd. (NASDAQ:CRNT)?
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the second quarter of 2019. On the other hand, there were a total of 6 hedge funds with a bullish position in CRNT a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in Ceragon Networks Ltd. (NASDAQ:CRNT) was held by Renaissance Technologies, which reported holding $11.1 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $0.7 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Arrowstreet Capital. 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 CRNT as a viable investment and initiated a position in the stock.
Let's check out hedge fund activity in other stocks similar to Ceragon Networks Ltd. (NASDAQ:CRNT). These stocks are New Age Beverages Corporation (NASDAQ:NBEV), Monroe Capital Corporation (NASDAQ:MRCC), Bankwell Financial Group, Inc. (NASDAQ:BWFG), and Tuscan Holdings Corp. II (NASDAQ:THCA). This group of stocks' market caps are closest to CRNT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NBEV,6,1169,2 MRCC,6,2832,2 BWFG,6,45471,1 THCA,9,31142,9 Average,6.75,20154,3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $12 million in CRNT's case. Tuscan Holdings Corp. II (NASDAQ:THCA) is the most popular stock in this table. On the other hand New Age Beverages Corporation (NASDAQ:NBEV) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Ceragon Networks Ltd. (NASDAQ:CRNT) is even less popular than NBEV. Hedge funds dodged a bullet by taking a bearish stance towards CRNT. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CRNT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CRNT investors were disappointed as the stock returned -27.1% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.