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 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% 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' 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 Actuant Corporation (NYSE:ATU).
Is Actuant Corporation (NYSE:ATU) undervalued? Money managers are in a pessimistic mood. The number of long hedge fund bets retreated by 2 in recent months. Our calculations also showed that ATU 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 32 percentage points since May 2014 through March 12, 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.
Let's check out the recent hedge fund action surrounding Actuant Corporation (NYSE:ATU).
What have hedge funds been doing with Actuant Corporation (NYSE:ATU)?
At Q4's end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. By comparison, 7 hedge funds held shares or bullish call options in ATU a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Southeastern Asset Management was the largest shareholder of Actuant Corporation (NYSE:ATU), with a stake worth $123.8 million reported as of the end of December. Trailing Southeastern Asset Management was Pzena Investment Management, which amassed a stake valued at $91.2 million. Cove Street Capital, Renaissance Technologies, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Actuant Corporation (NYSE:ATU) has witnessed a decline in interest from hedge fund managers, we can see that there lies a certain "tier" of fund managers that elected to cut their entire stakes in the third quarter. At the top of the heap, Israel Englander's Millennium Management cut the largest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $6.5 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dropped its stock, about $5.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Actuant Corporation (NYSE:ATU) but similarly valued. These stocks are Calavo Growers, Inc. (NASDAQ:CVGW), Endava plc (NYSE:DAVA), Industrial Logistics Properties Trust (NASDAQ:ILPT), and The Greenbrier Companies, Inc. (NYSE:GBX). This group of stocks' market values resemble ATU's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVGW,14,51082,2 DAVA,6,14931,-2 ILPT,19,203885,10 GBX,11,45221,-4 Average,12.5,78780,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $79 million. That figure was $245 million in ATU's case. Industrial Logistics Properties Trust (NASDAQ:ILPT) is the most popular stock in this table. On the other hand Endava plc (NYSE:DAVA) is the least popular one with only 6 bullish hedge fund positions. Actuant Corporation (NYSE:ATU) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on ATU, though not to the same extent, as the stock returned 22.3% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.