It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Workhorse Group, Inc. (NASDAQ:WKHS).
Workhorse Group, Inc. (NASDAQ:WKHS) has seen an increase in hedge fund interest in recent months. Our calculations also showed that WKHS 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.
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_189632" align="alignnone" width="600"] David Harding of Winton Capital Management[/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. With all of this in mind we're going to take a look at the new hedge fund action encompassing Workhorse Group, Inc. (NASDAQ:WKHS).
How have hedgies been trading Workhorse Group, Inc. (NASDAQ:WKHS)?
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 67% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WKHS over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Till Bechtolsheimer's Arosa Capital Management has the number one position in Workhorse Group, Inc. (NASDAQ:WKHS), worth close to $6.6 million, amounting to 1.2% of its total 13F portfolio. The second most bullish fund manager is Winton Capital Management, managed by David Harding, which holds a $0.9 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that hold long positions contain Michael Gelband's ExodusPoint Capital, Matthew Strobeck's Birchview Capital and Andrew Weiss's Weiss Asset Management. In terms of the portfolio weights assigned to each position Arosa Capital Management allocated the biggest weight to Workhorse Group, Inc. (NASDAQ:WKHS), around 1.17% of its 13F portfolio. Birchview Capital is also relatively very bullish on the stock, setting aside 0.06 percent of its 13F equity portfolio to WKHS.
Consequently, specific money managers have been driving this bullishness. Winton Capital Management, managed by David Harding, initiated the largest position in Workhorse Group, Inc. (NASDAQ:WKHS). Winton Capital Management had $0.9 million invested in the company at the end of the quarter. Michael Gelband's ExodusPoint Capital also initiated a $0.1 million position during the quarter. The only other fund with a brand new WKHS position is Andrew Weiss's Weiss Asset Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Workhorse Group, Inc. (NASDAQ:WKHS) but similarly valued. These stocks are Xenon Pharmaceuticals Inc (NASDAQ:XENE), VolitionRX Limited (NYSE:VNRX), Provident Bancorp, Inc. (NASDAQ:PVBC), and Concrete Pumping Holdings, Inc. (NASDAQ:BBCP). All of these stocks' market caps resemble WKHS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XENE,16,101425,-1 VNRX,1,378,0 PVBC,3,7158,1 BBCP,9,45723,-1 Average,7.25,38671,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.25 hedge funds with bullish positions and the average amount invested in these stocks was $39 million. That figure was $8 million in WKHS's case. Xenon Pharmaceuticals Inc (NASDAQ:XENE) is the most popular stock in this table. On the other hand VolitionRX Limited (NYSE:VNRX) is the least popular one with only 1 bullish hedge fund positions. Workhorse Group, Inc. (NASDAQ:WKHS) 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 WKHS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WKHS investors were disappointed as the stock returned -21.4% 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.