Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The fourth quarter of 2018 is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Matthews International Corp (NASDAQ:MATW).
Matthews International Corp (NASDAQ:MATW) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds' portfolios at the end of December. At the end of this article we will also compare MATW to other stocks including Raven Industries, Inc. (NASDAQ:RAVN), Tootsie Roll Industries, Inc. (NYSE:TR), and Phibro Animal Health Corp (NASDAQ:PAHC) to get a better sense of its popularity.
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 review the latest hedge fund action encompassing Matthews International Corp (NASDAQ:MATW).
Hedge fund activity in Matthews International Corp (NASDAQ:MATW)
At the end of the fourth quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in MATW a year ago. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in Matthews International Corp (NASDAQ:MATW) was held by Rutabaga Capital Management, which reported holding $11.8 million worth of stock at the end of December. It was followed by Marshall Wace LLP with a $9.6 million position. Other investors bullish on the company included Ariel Investments, GAMCO Investors, and D E Shaw.
Because Matthews International Corp (NASDAQ:MATW) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of money managers who were dropping their entire stakes in the third quarter. Intriguingly, Frederick DiSanto's Ancora Advisors dropped the largest stake of the 700 funds tracked by Insider Monkey, comprising about $4.4 million in stock, and Paul Tudor Jones's Tudor Investment Corp was right behind this move, as the fund sold off about $0.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to Matthews International Corp (NASDAQ:MATW). We will take a look at Raven Industries, Inc. (NASDAQ:RAVN), Tootsie Roll Industries, Inc. (NYSE:TR), Phibro Animal Health Corp (NASDAQ:PAHC), and La-Z-Boy Incorporated (NYSE:LZB). All of these stocks' market caps are closest to MATW's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RAVN,15,75979,0 TR,11,80950,-1 PAHC,20,55784,-1 LZB,17,59788,0 Average,15.75,68125,-0.5 [/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 $68 million. That figure was $53 million in MATW's case. Phibro Animal Health Corp (NASDAQ:PAHC) is the most popular stock in this table. On the other hand Tootsie Roll Industries, Inc. (NYSE:TR) is the least popular one with only 11 bullish hedge fund positions. Matthews International Corp (NASDAQ:MATW) 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. 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. Unfortunately MATW wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); MATW investors were disappointed as the stock returned -6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.