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Hedge Funds Have Never Been More Bullish On Badger Meter, Inc. (BMI)

Asma UL Husna

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 18.7% compared to 12.1%, 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.

Badger Meter, Inc. (NYSE:BMI) was in 14 hedge funds' portfolios at the end of the first quarter of 2019. BMI has experienced an increase in hedge fund sentiment of late. There were 12 hedge funds in our database with BMI positions at the end of the previous quarter. Our calculations also showed that BMI isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

GOTHAM ASSET MANAGEMENT

Let's check out the recent hedge fund action encompassing Badger Meter, Inc. (NYSE:BMI).

How have hedgies been trading Badger Meter, Inc. (NYSE:BMI)?

At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in BMI over the last 15 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

BMI_june2019

The largest stake in Badger Meter, Inc. (NYSE:BMI) was held by Impax Asset Management, which reported holding $73.3 million worth of stock at the end of March. It was followed by Royce & Associates with a $13.7 million position. Other investors bullish on the company included GAMCO Investors, Citadel Investment Group, and Millennium Management.

Consequently, specific money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Badger Meter, Inc. (NYSE:BMI). Arrowstreet Capital had $2.7 million invested in the company at the end of the quarter. Joel Greenblatt's Gotham Asset Management also made a $1 million investment in the stock during the quarter. The following funds were also among the new BMI investors: Jim Simons's Renaissance Technologies, Hoon Kim's Quantinno Capital, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Badger Meter, Inc. (NYSE:BMI) but similarly valued. These stocks are Tronox Holdings plc (NYSE:TROX), National Storage Affiliates Trust (NYSE:NSA), Harsco Corporation (NYSE:HSC), and Hovnanian Enterprises, Inc. (NYSE:HOV). All of these stocks' market caps resemble BMI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TROX,24,225222,-2 NSA,16,93854,-1 HSC,19,102389,-5 HOV,3,3359,-6 Average,15.5,106206,-3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $117 million in BMI's case. Tronox Holdings plc (NYSE:TROX) is the most popular stock in this table. On the other hand Hovnanian Enterprises, Inc. (NYSE:HOV) is the least popular one with only 3 bullish hedge fund positions. Badger Meter, Inc. (NYSE:BMI) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately BMI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); BMI investors were disappointed as the stock returned 3.5% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.

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

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