How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Echo Global Logistics, Inc. (NASDAQ:ECHO) and determine whether hedge funds had an edge regarding this stock.
Is Echo Global Logistics, Inc. (NASDAQ:ECHO) a buy here? The best stock pickers were taking a bullish view. The number of bullish hedge fund bets went up by 1 recently. Our calculations also showed that ECHO isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). ECHO was in 13 hedge funds' portfolios at the end of the first quarter of 2020. There were 12 hedge funds in our database with ECHO positions at the end of the previous quarter. Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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_26044" align="aligncenter" width="359"] Ken Griffin of Citadel Investment Group[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 largest silicon producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's check out the key hedge fund action regarding Echo Global Logistics, Inc. (NASDAQ:ECHO).
Hedge fund activity in Echo Global Logistics, Inc. (NASDAQ:ECHO)
Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ECHO over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Echo Global Logistics, Inc. (NASDAQ:ECHO) was held by Scopus Asset Management, which reported holding $9.3 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $4.7 million position. Other investors bullish on the company included Arrowstreet Capital, D E Shaw, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Scopus Asset Management allocated the biggest weight to Echo Global Logistics, Inc. (NASDAQ:ECHO), around 0.8% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.29 percent of its 13F equity portfolio to ECHO.
As aggregate interest increased, specific money managers were leading the bulls' herd. Scopus Asset Management, managed by Alexander Mitchell, initiated the most outsized position in Echo Global Logistics, Inc. (NASDAQ:ECHO). Scopus Asset Management had $9.3 million invested in the company at the end of the quarter. Hoon Kim's Quantinno Capital also made a $0.5 million investment in the stock during the quarter.
Let's also examine hedge fund activity in other stocks similar to Echo Global Logistics, Inc. (NASDAQ:ECHO). We will take a look at American Software, Inc. (NASDAQ:AMSWA), Smith & Wesson Brands, Inc. (NASDAQ:AOBC), First Foundation Inc (NASDAQ:FFWM), and MGP Ingredients Inc (NASDAQ:MGPI). This group of stocks' market values are closest to ECHO's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMSWA,12,46226,1 AOBC,22,55666,11 FFWM,12,20576,-1 MGPI,11,10980,-4 Average,14.25,33362,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $33 million. That figure was $27 million in ECHO's case. Smith & Wesson Brands, Inc. (NASDAQ:AOBC) is the most popular stock in this table. On the other hand MGP Ingredients Inc (NASDAQ:MGPI) is the least popular one with only 11 bullish hedge fund positions. Echo Global Logistics, Inc. (NASDAQ:ECHO) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately ECHO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ECHO investors were disappointed as the stock returned 19.3% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.