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 NorthWestern Corporation (NYSE:NWE).
Hedge fund interest in NorthWestern Corporation (NYSE:NWE) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare NWE to other stocks including Intercept Pharmaceuticals Inc (NASDAQ:ICPT), China Biologic Products Inc (NASDAQ:CBPO), and International Game Technology PLC (NYSE:IGT) 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 take a look at the key hedge fund action surrounding NorthWestern Corporation (NYSE:NWE).
How are hedge funds trading NorthWestern Corporation (NYSE:NWE)?
At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in NWE over the last 14 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.
The largest stake in NorthWestern Corporation (NYSE:NWE) was held by AQR Capital Management, which reported holding $66 million worth of stock at the end of September. It was followed by GLG Partners with a $25.2 million position. Other investors bullish on the company included GAMCO Investors, Renaissance Technologies, and Blackstart Capital.
Because NorthWestern Corporation (NYSE:NWE) has faced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of funds that slashed their full holdings heading into Q3. It's worth mentioning that Brandon Haley's Holocene Advisors dropped the largest stake of the "upper crust" of funds tracked by Insider Monkey, comprising an estimated $1.2 million in stock. Sara Nainzadeh's fund, Centenus Global Management, also said goodbye to its stock, about $0.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to NorthWestern Corporation (NYSE:NWE). These stocks are Intercept Pharmaceuticals Inc (NASDAQ:ICPT), China Biologic Products Inc (NASDAQ:CBPO), International Game Technology PLC (NYSE:IGT), and Community Bank System, Inc. (NYSE:CBU). This group of stocks' market values match NWE's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ICPT,21,150563,2 CBPO,7,113217,-1 IGT,34,590006,-3 CBU,11,23103,2 Average,18.25,219222,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $219 million. That figure was $160 million in NWE's case. International Game Technology PLC (NYSE:IGT) is the most popular stock in this table. On the other hand China Biologic Products Inc (NASDAQ:CBPO) is the least popular one with only 7 bullish hedge fund positions. NorthWestern Corporation (NYSE:NWE) 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 NWE wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); NWE investors were disappointed as the stock returned 14.6% 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.