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 you 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 Rayonier Advanced Materials Inc (NYSE:RYAM).
Is Rayonier Advanced Materials Inc (NYSE:RYAM) a buy, sell, or hold? The best stock pickers are in a bearish mood. The number of long hedge fund bets fell by 12 in recent months. Our calculations also showed that RYAM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). RYAM was in 11 hedge funds' portfolios at the end of the third quarter of 2019. There were 23 hedge funds in our database with RYAM positions at the end of the previous quarter. 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_340081" align="aligncenter" width="600"] Phill Gross of Adage Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a peek at the new hedge fund action encompassing Rayonier Advanced Materials Inc (NYSE:RYAM).
How have hedgies been trading Rayonier Advanced Materials Inc (NYSE:RYAM)?
At Q3's end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -52% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RYAM over the last 17 quarters. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Rayonier Advanced Materials Inc (NYSE:RYAM), which was worth $19.1 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $7.8 million worth of shares. Hawkeye Capital, Royce & Associates, 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 Hawkeye Capital allocated the biggest weight to Rayonier Advanced Materials Inc (NYSE:RYAM), around 2.29% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to RYAM.
Because Rayonier Advanced Materials Inc (NYSE:RYAM) has experienced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of funds who sold off their full holdings by the end of the third quarter. Intriguingly, Richard McGuire's Marcato Capital Management dumped the biggest stake of the 750 funds followed by Insider Monkey, totaling close to $7.3 million in stock. Andrew Weiss's fund, Weiss Asset Management, also said goodbye to its stock, about $6.3 million worth. These moves are important to note, as total hedge fund interest dropped by 12 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks similar to Rayonier Advanced Materials Inc (NYSE:RYAM). These stocks are Northwest Pipe Company (NASDAQ:NWPX), Twelve Seas Investment Company (NASDAQ:BROG), Reading International, Inc. (NASDAQ:RDI), and Forty Seven, Inc. (NASDAQ:FTSV). This group of stocks' market valuations are similar to RYAM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NWPX,11,37764,1 BROG,8,17206,-3 RDI,7,17875,1 FTSV,9,34213,2 Average,8.75,26765,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $27 million. That figure was $31 million in RYAM's case. Northwest Pipe Company (NASDAQ:NWPX) is the most popular stock in this table. On the other hand Reading International, Inc. (NASDAQ:RDI) is the least popular one with only 7 bullish hedge fund positions. Rayonier Advanced Materials Inc (NYSE:RYAM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately RYAM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RYAM were disappointed as the stock returned -9.5% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.