Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
We're going to check out the key hedge fund action encompassing TowneBank (NASDAQ:TOWN).
How have hedgies been trading TowneBank (NASDAQ:TOWN)?
Heading into the first quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2018. By comparison, 12 hedge funds held shares or bullish call options in TOWN a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of TowneBank (NASDAQ:TOWN), with a stake worth $24.4 million reported as of the end of December. Trailing Renaissance Technologies was Millennium Management, which amassed a stake valued at $4.8 million. D E Shaw, Zebra Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that TowneBank (NASDAQ:TOWN) has experienced declining sentiment from the smart money, it's safe to say that there exists a select few fund managers who were dropping their positions entirely heading into Q3. It's worth mentioning that Ravi Chopra's Azora Capital said goodbye to the biggest investment of the "upper crust" of funds watched by Insider Monkey, totaling about $4 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also said goodbye to its call options, about $1.6 million worth. These transactions are interesting, as total hedge fund interest was cut by 1 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks similar to TowneBank (NASDAQ:TOWN). We will take a look at PTC Therapeutics, Inc. (NASDAQ:PTCT), Steelcase Inc. (NYSE:SCS), Apptio, Inc. (NASDAQ:APTI), and Switch, Inc. (NYSE:SWCH). All of these stocks' market caps match TOWN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PTCT,25,434907,-5 SCS,22,83481,3 APTI,22,387162,-3 SWCH,14,107175,2 Average,20.75,253181,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $253 million. That figure was $32 million in TOWN's case. PTC Therapeutics, Inc. (NASDAQ:PTCT) is the most popular stock in this table. On the other hand Switch, Inc. (NYSE:SWCH) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks TowneBank (NASDAQ:TOWN) is even less popular than SWCH. Hedge funds dodged a bullet by taking a bearish stance towards TOWN. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately TOWN wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); TOWN investors were disappointed as the stock returned 10.3% 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.
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