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 last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 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 Nordson Corporation (NASDAQ:NDSN).
Is Nordson Corporation (NASDAQ:NDSN) an outstanding investment right now? Hedge funds are in a bullish mood. The number of bullish hedge fund positions rose by 4 lately. Our calculations also showed that NDSN isn't among the 30 most popular stocks among hedge funds (view the video below). NDSN was in 17 hedge funds' portfolios at the end of the second quarter of 2019. There were 13 hedge funds in our database with NDSN positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the latest hedge fund action encompassing Nordson Corporation (NASDAQ:NDSN).
Hedge fund activity in Nordson Corporation (NASDAQ:NDSN)
Heading into the third quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 31% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NDSN over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the most valuable position in Nordson Corporation (NASDAQ:NDSN). Royce & Associates has a $17.7 million position in the stock, comprising 0.2% of its 13F portfolio. Sitting at the No. 2 spot is Robert Joseph Caruso of Select Equity Group, with a $10 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism consist of Mario Gabelli's GAMCO Investors, Ken Griffin's Citadel Investment Group and Curtis Schenker and Craig Effron's Scoggin.
As aggregate interest increased, key hedge funds were leading the bulls' herd. Select Equity Group, managed by Robert Joseph Caruso, created the most valuable position in Nordson Corporation (NASDAQ:NDSN). Select Equity Group had $10 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also initiated a $1.8 million position during the quarter. The other funds with new positions in the stock are Richard Driehaus's Driehaus Capital, Matthew Tewksbury's Stevens Capital Management, and Matthew Hulsizer's PEAK6 Capital Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Nordson Corporation (NASDAQ:NDSN) but similarly valued. These stocks are Omega Healthcare Investors Inc (NYSE:OHI), Brookfield Property Partners LP (NASDAQ:BPY), Carlyle Group LP (NASDAQ:CG), and Xerox Holdings Corporation (NYSE:XRX). This group of stocks' market valuations are closest to NDSN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OHI,17,284232,4 BPY,6,53961,-2 CG,7,163854,0 XRX,28,1378620,-5 Average,14.5,470167,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $470 million. That figure was $47 million in NDSN's case. Xerox Holdings Corporation (NYSE:XRX) is the most popular stock in this table. On the other hand Brookfield Property Partners LP (NASDAQ:BPY) is the least popular one with only 6 bullish hedge fund positions. Nordson Corporation (NASDAQ:NDSN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on NDSN, though not to the same extent, as the stock returned 3.8% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.