Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Kingstone Companies Inc (NASDAQ:KINS) investors should pay attention to an increase in enthusiasm from smart money recently. KINS was in 6 hedge funds' portfolios at the end of the third quarter of 2019. There were 4 hedge funds in our database with KINS positions at the end of the previous quarter. Our calculations also showed that KINS 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.
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_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma Advisors[/caption]
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. Now let's take a glance at the new hedge fund action encompassing Kingstone Companies Inc (NASDAQ:KINS).
How have hedgies been trading Kingstone Companies Inc (NASDAQ:KINS)?
Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 50% from the second quarter of 2019. On the other hand, there were a total of 2 hedge funds with a bullish position in KINS 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.
The largest stake in Kingstone Companies Inc (NASDAQ:KINS) was held by Royce & Associates, which reported holding $4.5 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $3.3 million position. Other investors bullish on the company included Millennium Management, Two Sigma Advisors, and Paloma Partners. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Kingstone Companies Inc (NASDAQ:KINS), around 0.04% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.0028 percent of its 13F equity portfolio to KINS.
Now, key hedge funds were leading the bulls' herd. Two Sigma Advisors, managed by John Overdeck and David Siegel, initiated the most valuable position in Kingstone Companies Inc (NASDAQ:KINS). Two Sigma Advisors had $0.4 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also initiated a $0.1 million position during the quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Kingstone Companies Inc (NASDAQ:KINS) but similarly valued. We will take a look at Allena Pharmaceuticals, Inc. (NASDAQ:ALNA), Independence Contract Drilling Inc (NYSE:ICD), Cumberland Pharmaceuticals, Inc. (NASDAQ:CPIX), and Four Seasons Education (Cayman) Inc. (NYSE:FEDU). This group of stocks' market caps resemble KINS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALNA,7,19390,1 ICD,12,43780,2 CPIX,3,8535,0 FEDU,4,5149,-1 Average,6.5,19214,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $9 million in KINS's case. Independence Contract Drilling Inc (NYSE:ICD) is the most popular stock in this table. On the other hand Cumberland Pharmaceuticals, Inc. (NASDAQ:CPIX) is the least popular one with only 3 bullish hedge fund positions. Kingstone Companies Inc (NASDAQ:KINS) 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 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 KINS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KINS investors were disappointed as the stock returned -9.7% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.