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Do Hedge Funds Love Caesarstone Ltd (CSTE)?

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·6 min read
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While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Caesarstone Ltd (NASDAQ:CSTE).

Is Caesarstone Ltd (NASDAQ:CSTE) an outstanding stock to buy now? Prominent investors were becoming less confident. The number of bullish hedge fund positions fell by 1 recently. Caesarstone Ltd (NASDAQ:CSTE) was in 6 hedge funds' portfolios at the end of September. The all time high for this statistics is 22. Our calculations also showed that CSTE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

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 66 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.

David E. Shaw of D.E. Shaw
David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. With all of this in mind we're going to take a glance at the fresh hedge fund action encompassing Caesarstone Ltd (NASDAQ:CSTE).

How are hedge funds trading Caesarstone Ltd (NASDAQ:CSTE)?

Heading into the fourth quarter of 2020, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in CSTE a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Caesarstone Ltd (NASDAQ:CSTE), which was worth $5.9 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $2.4 million worth of shares. D E Shaw, Invenomic Capital Management, and PEAK6 Capital Management 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 Invenomic Capital Management allocated the biggest weight to Caesarstone Ltd (NASDAQ:CSTE), around 0.58% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to CSTE.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Two Sigma Advisors. 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 CSTE as a viable investment and initiated a position in the stock.

Let's check out hedge fund activity in other stocks similar to Caesarstone Ltd (NASDAQ:CSTE). These stocks are Revlon Inc (NYSE:REV), LendingClub Corp (NYSE:LC), The Hackett Group, Inc. (NASDAQ:HCKT), Alerus Financial Corporation (NASDAQ:ALRS), Casa Systems, Inc. (NASDAQ:CASA), One Liberty Properties, Inc. (NYSE:OLP), and Daily Journal Corporation (NASDAQ:DJCO). This group of stocks' market caps are similar to CSTE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position REV,32,253557,-2 LC,13,13470,1 HCKT,15,85266,-2 ALRS,1,598,0 CASA,11,7479,2 OLP,7,22139,-1 DJCO,2,651,0 Average,11.6,54737,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.6 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $12 million in CSTE's case. Revlon Inc (NYSE:REV) is the most popular stock in this table. On the other hand Alerus Financial Corporation (NASDAQ:ALRS) is the least popular one with only 1 bullish hedge fund positions. Caesarstone Ltd (NASDAQ:CSTE) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CSTE is 20.2. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on CSTE as the stock returned 25.6% since the end of the third quarter (through 11/27) and outperformed the market by an even larger margin.

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

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