Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index returned approximately 26% through November 22nd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 35% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Patriot Transportation Holding Inc (NASDAQ:PATI).
Hedge fund interest in Patriot Transportation Holding Inc (NASDAQ:PATI) 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 PATI to other stocks including Merrimack Pharmaceuticals Inc (NASDAQ:MACK), Greenland Acquisition Corporation (NASDAQ:GLAC), and Zovio Inc. (NASDAQ:ZVO) to get a better sense of its popularity.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to view the fresh hedge fund action encompassing Patriot Transportation Holding Inc (NASDAQ:PATI).
What does smart money think about Patriot Transportation Holding Inc (NASDAQ:PATI)?
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 2 hedge funds with a bullish position in PATI a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Minerva Advisors was the largest shareholder of Patriot Transportation Holding Inc (NASDAQ:PATI), with a stake worth $4.4 million reported as of the end of September. Trailing Minerva Advisors was Royce & Associates, which amassed a stake valued at $3.7 million. Cove Street Capital was also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Minerva Advisors allocated the biggest weight to Patriot Transportation Holding Inc (NASDAQ:PATI), around 2.42% of its portfolio. Cove Street Capital is also relatively very bullish on the stock, dishing out 0.08 percent of its 13F equity portfolio to PATI.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Patriot Transportation Holding Inc (NASDAQ:PATI) but similarly valued. These stocks are Merrimack Pharmaceuticals Inc (NASDAQ:MACK), Greenland Acquisition Corporation (NASDAQ:GLAC), Zovio Inc. (NASDAQ:ZVO), and Fellazo Inc. (NASDAQ:FLLC). This group of stocks' market valuations resemble PATI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MACK,4,8753,-1 GLAC,6,6869,0 ZVO,13,15399,3 FLLC,5,14615,5 Average,7,11409,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $11 million. That figure was $9 million in PATI's case. Zovio Inc. (NASDAQ:ZVO) is the most popular stock in this table. On the other hand Merrimack Pharmaceuticals Inc (NASDAQ:MACK) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Patriot Transportation Holding Inc (NASDAQ:PATI) is even less popular than MACK. Hedge funds dodged a bullet by taking a bearish stance towards PATI. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately PATI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PATI investors were disappointed as the stock returned -2.8% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.