We can judge whether Rite Aid Corporation (NYSE:RAD) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Is Rite Aid Corporation (NYSE:RAD) a splendid stock to buy now? Prominent investors are becoming less hopeful. The number of long hedge fund bets dropped by 1 recently. Our calculations also showed that RAD isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). RAD was in 8 hedge funds' portfolios at the end of the third quarter of 2019. There were 9 hedge funds in our database with RAD 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.
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_30602" align="alignnone" width="600"] Philippe Laffont of Coatue Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the new hedge fund action regarding Rite Aid Corporation (NYSE:RAD).
What have hedge funds been doing with Rite Aid Corporation (NYSE:RAD)?
At Q3's end, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in RAD a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Coatue Management, managed by Philippe Laffont, holds the largest position in Rite Aid Corporation (NYSE:RAD). Coatue Management has a $3.7 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Sculptor Capital, holding a $1.2 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism comprise Renaissance Technologies, Phill Gross and Robert Atchinson's Adage Capital Management and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Coatue Management allocated the biggest weight to Rite Aid Corporation (NYSE:RAD), around 0.03% of its 13F portfolio. Sculptor Capital is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to RAD.
Due to the fact that Rite Aid Corporation (NYSE:RAD) has witnessed falling interest from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of fund managers that slashed their full holdings last quarter. Interestingly, Bruce J. Richards and Louis Hanover's Marathon Asset Management sold off the biggest stake of the 750 funds tracked by Insider Monkey, comprising close to $4.1 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dropped its stock, about $0.8 million worth. These transactions are interesting, as total hedge fund interest dropped by 1 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Rite Aid Corporation (NYSE:RAD) but similarly valued. We will take a look at CONSOL Coal Resources LP (NYSE:CCR), Park-Ohio Holdings Corp. (NASDAQ:PKOH), VirnetX Holding Corporation (NYSE:VHC), and Southern National Banc. of Virginia, Inc (NASDAQ:SONA). This group of stocks' market values are similar to RAD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCR,4,76134,0 PKOH,8,28571,1 VHC,4,470,1 SONA,9,21060,2 Average,6.25,31559,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.25 hedge funds with bullish positions and the average amount invested in these stocks was $32 million. That figure was $9 million in RAD's case. Southern National Banc. of Virginia, Inc (NASDAQ:SONA) is the most popular stock in this table. On the other hand CONSOL Coal Resources LP (NYSE:CCR) is the least popular one with only 4 bullish hedge fund positions. Rite Aid Corporation (NYSE:RAD) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on RAD as the stock returned 30.4% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.