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Do Hedge Funds Love Compass Diversified Holdings LLC (CODI)?

Nina Todic

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Compass Diversified Holdings LLC (NYSE:CODI) and see how the stock is affected by the recent hedge fund activity.

Hedge fund interest in Compass Diversified Holdings LLC (NYSE:CODI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Brookline Bancorp, Inc. (NASDAQ:BRKL), Enanta Pharmaceuticals Inc (NASDAQ:ENTA), and Kearny Financial Corp. (NASDAQ:KRNY) to gather more data points. Our calculations also showed that CODI 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

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.

[caption id="attachment_27480" align="aligncenter" width="450"] Israel Englander of Millennium Management[/caption]

Izzy Englander of MILLENNIUM MANAGEMENT

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 go over the recent hedge fund action encompassing Compass Diversified Holdings LLC (NYSE:CODI).

What does smart money think about Compass Diversified Holdings LLC (NYSE:CODI)?

At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. By comparison, 4 hedge funds held shares or bullish call options in CODI a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Intrinsic Edge Capital held the most valuable stake in Compass Diversified Holdings LLC (NYSE:CODI), which was worth $2 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $1 million worth of shares. Two Sigma Advisors, Renaissance Technologies, and Millennium 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 Intrinsic Edge Capital allocated the biggest weight to Compass Diversified Holdings LLC (NYSE:CODI), around 0.22% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, earmarking 0.0024 percent of its 13F equity portfolio to CODI.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Compass Diversified Holdings LLC (NYSE:CODI) but similarly valued. These stocks are Brookline Bancorp, Inc. (NASDAQ:BRKL), Enanta Pharmaceuticals Inc (NASDAQ:ENTA), Kearny Financial Corp. (NASDAQ:KRNY), and Encore Wire Corporation (NASDAQ:WIRE). This group of stocks' market values match CODI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRKL,11,59263,3 ENTA,16,200896,-4 KRNY,16,132793,3 WIRE,16,45331,1 Average,14.75,109571,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $110 million. That figure was $5 million in CODI's case. Enanta Pharmaceuticals Inc (NASDAQ:ENTA) is the most popular stock in this table. On the other hand Brookline Bancorp, Inc. (NASDAQ:BRKL) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Compass Diversified Holdings LLC (NYSE:CODI) is even less popular than BRKL. Hedge funds clearly dropped the ball on CODI 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 CODI as the stock returned 22.4% 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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