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Hedge Funds Are Dumping Insteel Industries Inc (NASDAQ:IIIN)

Faizan Farooque

We are still in an overall bull market and many stocks that smart money investors were piling into 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. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees your average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Insteel Industries Inc (NASDAQ:IIIN).

Is Insteel Industries Inc (NASDAQ:IIIN) undervalued? Prominent investors are in a bearish mood. The number of long hedge fund bets retreated by 3 recently. Our calculations also showed that IIIN 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.

5 Most Popular Stocks Among Hedge Funds

To most market participants, hedge funds are viewed as worthless, outdated investment tools of yesteryear. While there are over 8000 funds in operation at the moment, Our experts hone in on the bigwigs of this group, about 750 funds. These investment experts control the bulk of the smart money's total capital, and by watching their finest picks, Insider Monkey has deciphered numerous investment strategies that have historically beaten the market. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update.

[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

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. With all of this in mind let's review the latest hedge fund action regarding Insteel Industries Inc (NASDAQ:IIIN).

What does smart money think about Insteel Industries Inc (NASDAQ:IIIN)?

At the end of the third quarter, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -50% from the second quarter of 2019. By comparison, 16 hedge funds held shares or bullish call options in IIIN a year ago. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Is Insteel Industries Inc (NASDAQ:IIIN) Going to Burn These Hedge Funds?

Among these funds, Royce & Associates held the most valuable stake in Insteel Industries Inc (NASDAQ:IIIN), which was worth $37 million at the end of the third quarter. On the second spot was D E Shaw which amassed $2 million worth of shares. Two Sigma Advisors was 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, Royce & Associates allocated the biggest weight to Insteel Industries Inc (NASDAQ:IIIN), around 0.34% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, setting aside 0.0036 percent of its 13F equity portfolio to IIIN.

Judging by the fact that Insteel Industries Inc (NASDAQ:IIIN) has faced falling interest from hedge fund managers, we can see that there is a sect of money managers who were dropping their positions entirely in the third quarter. At the top of the heap, Cliff Asness's AQR Capital Management cut the biggest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $1.5 million in stock, and Jeffrey Moskowitz's Harvey Partners was right behind this move, as the fund sold off about $0.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 3 funds in the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Insteel Industries Inc (NASDAQ:IIIN) but similarly valued. We will take a look at ChemoCentryx Inc (NASDAQ:CCXI), Willdan Group, Inc. (NASDAQ:WLDN), BioSpecifics Technologies Corp. (NASDAQ:BSTC), and AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG). All of these stocks' market caps resemble IIIN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCXI,17,64755,0 WLDN,6,9610,1 BSTC,12,58911,1 AMAG,15,188076,-2 Average,12.5,80338,0 [/table]

View the table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $40 million in IIIN's case. ChemoCentryx Inc (NASDAQ:CCXI) is the most popular stock in this table. On the other hand, Willdan Group, Inc. (NASDAQ:WLDN) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Insteel Industries Inc (NASDAQ:IIIN) is even less popular than WLDN. Hedge funds clearly dropped the ball on IIIN 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on IIIN as the stock returned 13.6% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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