Billionaire hedge fund managers such as David Abrams, Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.
Ambac Financial Group, Inc. (NASDAQ:AMBC) was in 19 hedge funds' portfolios at the end of March. AMBC investors should pay attention to an increase in support from the world's most elite money managers in recent months. There were 17 hedge funds in our database with AMBC positions at the end of the previous quarter. Our calculations also showed that ambc isn't among the 30 most popular stocks among hedge funds.
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 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.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
We're going to take a peek at the key hedge fund action regarding Ambac Financial Group, Inc. (NASDAQ:AMBC).
What does the smart money think about Ambac Financial Group, Inc. (NASDAQ:AMBC)?
At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in AMBC a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, EJF Capital held the most valuable stake in Ambac Financial Group, Inc. (NASDAQ:AMBC), which was worth $37.4 million at the end of the first quarter. On the second spot was Raging Capital Management which amassed $24.7 million worth of shares. Moreover, Tontine Asset Management, GLG Partners, and Citadel Investment Group were also bullish on Ambac Financial Group, Inc. (NASDAQ:AMBC), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, specific money managers were breaking ground themselves. Winton Capital Management, managed by David Harding, assembled the most outsized position in Ambac Financial Group, Inc. (NASDAQ:AMBC). Winton Capital Management had $0.3 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser's Magnetar Capital also initiated a $0.2 million position during the quarter. The other funds with brand new AMBC positions are Michael Platt and William Reeves's BlueCrest Capital Mgmt. and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Ambac Financial Group, Inc. (NASDAQ:AMBC) but similarly valued. We will take a look at Athenex, Inc. (NASDAQ:ATNX), AxoGen, Inc. (NASDAQ:AXGN), Renewable Energy Group Inc (NASDAQ:REGI), and nLIGHT, Inc. (NASDAQ:LASR). This group of stocks' market caps are closest to AMBC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATNX,8,87665,-2 AXGN,19,129818,1 REGI,19,84797,1 LASR,5,57624,1 Average,12.75,89976,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $90 million. That figure was $126 million in AMBC's case. AxoGen, Inc. (NASDAQ:AXGN) is the most popular stock in this table. On the other hand nLIGHT, Inc. (NASDAQ:LASR) is the least popular one with only 5 bullish hedge fund positions. Ambac Financial Group, Inc. (NASDAQ:AMBC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately AMBC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AMBC were disappointed as the stock returned -16.2% during the same 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.