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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Arrow Financial Corporation (NASDAQ:AROW)? The smart money sentiment can provide an answer to this question.
Arrow Financial Corporation (NASDAQ:AROW) shareholders have witnessed a decrease in activity from the world's largest hedge funds recently. Arrow Financial Corporation (NASDAQ:AROW) was in 3 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 6. There were 4 hedge funds in our database with AROW positions at the end of the fourth quarter. Our calculations also showed that AROW isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
David Siegel of Two Sigma Advisors
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let's take a peek at the latest hedge fund action encompassing Arrow Financial Corporation (NASDAQ:AROW).
Do Hedge Funds Think AROW Is A Good Stock To Buy Now?
Heading into the second quarter of 2021, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the fourth quarter of 2020. On the other hand, there were a total of 4 hedge funds with a bullish position in AROW a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Arrow Financial Corporation (NASDAQ:AROW), with a stake worth $11.5 million reported as of the end of March. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $0.3 million. Citadel Investment Group 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 Renaissance Technologies allocated the biggest weight to Arrow Financial Corporation (NASDAQ:AROW), around 0.01% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, designating 0.0009 percent of its 13F equity portfolio to AROW.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Winton Capital Management. 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 AROW as a viable investment and initiated a position in the stock.
Let's now review hedge fund activity in other stocks similar to Arrow Financial Corporation (NASDAQ:AROW). These stocks are Kimball International Inc (NASDAQ:KBAL), Moneygram International Inc (NASDAQ:MGI), Independent Bank Corporation (NASDAQ:IBCP), Amalgamated Financial Corp. (NASDAQ:AMAL), Fly Leasing Ltd (NYSE:FLY), Waterstone Financial, Inc. (NASDAQ:WSBF), and Sierra Metals Inc. (NYSE:SMTS). This group of stocks' market valuations are similar to AROW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KBAL,16,47865,-2 MGI,21,93356,3 IBCP,12,41998,-2 AMAL,9,45173,1 FLY,18,79381,9 WSBF,10,77054,-2 SMTS,8,12731,4 Average,13.4,56794,1.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.4 hedge funds with bullish positions and the average amount invested in these stocks was $57 million. That figure was $12 million in AROW's case. Moneygram International Inc (NASDAQ:MGI) is the most popular stock in this table. On the other hand Sierra Metals Inc. (NYSE:SMTS) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Arrow Financial Corporation (NASDAQ:AROW) is even less popular than SMTS. Our overall hedge fund sentiment score for AROW is 19. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds clearly dropped the ball on AROW as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th and still beat the market by 3.3 percentage points. A small number of hedge funds were also right about betting on AROW as the stock returned 11.5% since Q1 (through June 11th) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.