Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% 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 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
First Interstate Bancsystem Inc (NASDAQ:FIBK) investors should be aware of a decrease in enthusiasm from smart money in recent months. FIBK was in 9 hedge funds' portfolios at the end of September. There were 11 hedge funds in our database with FIBK positions at the end of the previous quarter. Our calculations also showed that FIBK 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.
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_256989" align="aligncenter" width="600"] Dmitry Balyasny of Balyasny Asset Managemnet[/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 take a gander at the key hedge fund action regarding First Interstate Bancsystem Inc (NASDAQ:FIBK).
How have hedgies been trading First Interstate Bancsystem Inc (NASDAQ:FIBK)?
At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FIBK over the last 17 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
Among these funds, Citadel Investment Group held the most valuable stake in First Interstate Bancsystem Inc (NASDAQ:FIBK), which was worth $26.5 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $18.6 million worth of shares. Balyasny Asset Management, AQR Capital Management, and Two Sigma Advisors 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 Balyasny Asset Management allocated the biggest weight to First Interstate Bancsystem Inc (NASDAQ:FIBK), around 0.07% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.05 percent of its 13F equity portfolio to FIBK.
Because First Interstate Bancsystem Inc (NASDAQ:FIBK) has witnessed declining sentiment from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of hedgies that elected to cut their entire stakes heading into Q4. Interestingly, Anton Schutz's Mendon Capital Advisors sold off the largest investment of all the hedgies watched by Insider Monkey, worth about $3.7 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also dumped its call options, about $1 million worth. These transactions are interesting, as total hedge fund interest fell by 2 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as First Interstate Bancsystem Inc (NASDAQ:FIBK) but similarly valued. We will take a look at Cabot Corporation (NYSE:CBT), Barnes Group Inc. (NYSE:B), Dorman Products Inc. (NASDAQ:DORM), and Canada Goose Holdings Inc. (NYSE:GOOS). This group of stocks' market valuations resemble FIBK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBT,18,120961,1 B,13,24632,-2 DORM,13,48985,-1 GOOS,14,305816,-4 Average,14.5,125099,-1.5 [/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 $125 million. That figure was $62 million in FIBK's case. Cabot Corporation (NYSE:CBT) is the most popular stock in this table. On the other hand Barnes Group Inc. (NYSE:B) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks First Interstate Bancsystem Inc (NASDAQ:FIBK) is even less popular than B. Hedge funds dodged a bullet by taking a bearish stance towards FIBK. 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 FIBK wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); FIBK investors were disappointed as the stock returned 5.4% 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.