Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Everspin Technologies, Inc. (NASDAQ:MRAM).
Is Everspin Technologies, Inc. (NASDAQ:MRAM) a buy right now? Hedge funds are in a bullish mood. The number of long hedge fund bets rose by 1 in recent months. Our calculations also showed that MRAM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). MRAM was in 5 hedge funds' portfolios at the end of the third quarter of 2019. There were 4 hedge funds in our database with MRAM holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_189632" align="aligncenter" width="450"] 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. Now we're going to analyze the new hedge fund action surrounding Everspin Technologies, Inc. (NASDAQ:MRAM).
How are hedge funds trading Everspin Technologies, Inc. (NASDAQ:MRAM)?
At the end of the third quarter, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from the second quarter of 2019. By comparison, 2 hedge funds held shares or bullish call options in MRAM a year ago. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
The largest stake in Everspin Technologies, Inc. (NASDAQ:MRAM) was held by Raging Capital Management, which reported holding $4.7 million worth of stock at the end of September. It was followed by Royce & Associates with a $2.1 million position. Other investors bullish on the company included D E Shaw, Winton Capital Management, and Marshall Wace. In terms of the portfolio weights assigned to each position Raging Capital Management allocated the biggest weight to Everspin Technologies, Inc. (NASDAQ:MRAM), around 0.77% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to MRAM.
Now, key hedge funds have jumped into Everspin Technologies, Inc. (NASDAQ:MRAM) headfirst. Winton Capital Management, managed by David Harding, created the largest position in Everspin Technologies, Inc. (NASDAQ:MRAM). Winton Capital Management had $0.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also initiated a $0 million position during the quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Everspin Technologies, Inc. (NASDAQ:MRAM) but similarly valued. These stocks are Plumas Bancorp (NASDAQ:PLBC), Asure Software Inc (NASDAQ:ASUR), Infrastructure and Energy Alternatives, Inc. (NASDAQ:IEA), and Potbelly Corporation (NASDAQ:PBPB). This group of stocks' market valuations match MRAM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLBC,1,234,0 ASUR,5,9039,-2 IEA,7,7296,0 PBPB,9,20532,-2 Average,5.5,9275,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $7 million in MRAM's case. Potbelly Corporation (NASDAQ:PBPB) is the most popular stock in this table. On the other hand Plumas Bancorp (NASDAQ:PLBC) is the least popular one with only 1 bullish hedge fund positions. Everspin Technologies, Inc. (NASDAQ:MRAM) 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 MRAM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MRAM investors were disappointed as the stock returned -14.7% 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.