How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding American Railcar Industries, Inc. (NASDAQ:ARII).
Is American Railcar Industries, Inc. (NASDAQ:ARII) a healthy stock for your portfolio? Money managers are in a bullish mood. The number of bullish hedge fund bets advanced by 1 lately. Our calculations also showed that ARII 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 18 percentage points since May 2014 through December 3, 2018 (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.
We're going to take a look at the recent hedge fund action encompassing American Railcar Industries, Inc. (NASDAQ:ARII).
What does the smart money think about American Railcar Industries, Inc. (NASDAQ:ARII)?
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ARII over the last 13 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Icahn Capital LP held the most valuable stake in American Railcar Industries, Inc. (NASDAQ:ARII), which was worth $547.3 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $7.5 million worth of shares. Moreover, Renaissance Technologies, PEAK6 Capital Management, and Horizon Asset Management were also bullish on American Railcar Industries, Inc. (NASDAQ:ARII), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, some big names have jumped into American Railcar Industries, Inc. (NASDAQ:ARII) headfirst. PEAK6 Capital Management, managed by Matthew Hulsizer, initiated the largest call position in American Railcar Industries, Inc. (NASDAQ:ARII). PEAK6 Capital Management had $3.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $1.2 million investment in the stock during the quarter. The following funds were also among the new ARII investors: Noam Gottesman's GLG Partners, Joel Greenblatt's Gotham Asset Management, and Mario Gabelli's GAMCO Investors.
Let's also examine hedge fund activity in other stocks similar to American Railcar Industries, Inc. (NASDAQ:ARII). We will take a look at Comstock Resources Inc (NYSE:CRK), Cray Inc. (NASDAQ:CRAY), ViewRay, Inc. (NASDAQ:VRAY), and Intersect ENT Inc (NASDAQ:XENT). This group of stocks' market values are closest to ARII's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CRK,5,7315,-2 CRAY,13,59641,0 VRAY,23,322894,10 XENT,22,214135,1 Average,15.75,150996,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $568 million in ARII's case. ViewRay, Inc. (NASDAQ:VRAY) is the most popular stock in this table. On the other hand Comstock Resources Inc (NYSE:CRK) is the least popular one with only 5 bullish hedge fund positions. American Railcar Industries, Inc. (NASDAQ:ARII) 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. In this regard VRAY might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.