There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze RH (NYSE:RH).
Is RH (NYSE:RH) undervalued? Money managers are taking an optimistic view. The number of bullish hedge fund bets went up by 8 recently. Our calculations also showed that rh 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 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.
Let's analyze the new hedge fund action surrounding RH (NYSE:RH).
What have hedge funds been doing with RH (NYSE:RH)?
Heading into the second quarter of 2019, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in RH over the last 15 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management has the number one position in RH (NYSE:RH), worth close to $44.2 million, comprising 1.4% of its total 13F portfolio. The second largest stake is held by Ken Griffin of Citadel Investment Group, with a $34.9 million call position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish contain Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management, Anand Parekh's Alyeska Investment Group and Ken Griffin's Citadel Investment Group.
As industrywide interest jumped, key money managers were leading the bulls' herd. QVT Financial, managed by Daniel Gold, initiated the largest position in RH (NYSE:RH). QVT Financial had $24.6 million invested in the company at the end of the quarter. David Fiszel's Honeycomb Asset Management also initiated a $20.6 million position during the quarter. The other funds with new positions in the stock are Ryan Frick and Oliver Evans's Dorsal Capital Management, Alexander Mitchell's Scopus Asset Management, and Steve Cohen's Point72 Asset Management.
Let's also examine hedge fund activity in other stocks similar to RH (NYSE:RH). These stocks are Trustmark Corp (NASDAQ:TRMK), Aerie Pharmaceuticals Inc (NASDAQ:AERI), DiamondRock Hospitality Company (NYSE:DRH), and Zuora, Inc. (NYSE:ZUO). This group of stocks' market values match RH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRMK,11,37111,1 AERI,23,532150,0 DRH,13,206595,-6 ZUO,21,116298,7 Average,17,223039,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $223 million. That figure was $261 million in RH's case. Aerie Pharmaceuticals Inc (NASDAQ:AERI) is the most popular stock in this table. On the other hand Trustmark Corp (NASDAQ:TRMK) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks RH (NYSE:RH) is more popular among hedge funds. 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 RH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RH were disappointed as the stock returned -15.4% 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 in Q2.
Disclosure: None. This article was originally published at Insider Monkey.