Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Federal Signal Corporation (NYSE:FSS).
Federal Signal Corporation (NYSE:FSS) has seen a decrease in support from the world's most elite money managers lately. Our calculations also showed that fss isn't among the 30 most popular stocks among hedge funds.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We're going to take a look at the key hedge fund action surrounding Federal Signal Corporation (NYSE:FSS).
Hedge fund activity in Federal Signal Corporation (NYSE:FSS)
At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in FSS a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, GAMCO Investors was the largest shareholder of Federal Signal Corporation (NYSE:FSS), with a stake worth $20.4 million reported as of the end of March. Trailing GAMCO Investors was Royce & Associates, which amassed a stake valued at $7.8 million. Arrowstreet Capital, Impax Asset Management, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Federal Signal Corporation (NYSE:FSS) has experienced declining sentiment from hedge fund managers, it's easy to see that there were a few funds that decided to sell off their entire stakes by the end of the third quarter. Intriguingly, David Costen Haley's HBK Investments sold off the largest investment of the "upper crust" of funds watched by Insider Monkey, worth close to $0.8 million in stock. Benjamin A. Smith's fund, Laurion Capital Management, also sold off its stock, about $0.5 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Federal Signal Corporation (NYSE:FSS) but similarly valued. We will take a look at Redwood Trust, Inc. (NYSE:RWT), Oceaneering International, Inc. (NYSE:OII), Ferro Corporation (NYSE:FOE), and Prestige Consumer Healthcare Inc. (NYSE:PBH). This group of stocks' market caps are closest to FSS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RWT,15,111479,3 OII,21,127792,5 FOE,16,216138,-3 PBH,13,66863,-2 Average,16.25,130568,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $71 million in FSS's case. Oceaneering International, Inc. (NYSE:OII) is the most popular stock in this table. On the other hand Prestige Consumer Healthcare Inc. (NYSE:PBH) is the least popular one with only 13 bullish hedge fund positions. Federal Signal Corporation (NYSE:FSS) 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 FSS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FSS were disappointed as the stock returned -5.5% 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.