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 Index returned approximately 26.2% through November 22nd (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 34.7% 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 RCM Technologies, Inc. (NASDAQ:RCMT).
Is RCM Technologies, Inc. (NASDAQ:RCMT) going to take off soon? The best stock pickers are in an optimistic mood. The number of bullish hedge fund bets advanced by 1 in recent months. Our calculations also showed that RCMT isn't among the 30 most popular stocks among hedge funds. RCMT was in 3 hedge funds' portfolios at the end of September. There were 2 hedge funds in our database with RCMT holdings at the end of the previous quarter.
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 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 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 stocks that are in our short portfolio.
[caption id="attachment_258236" align="aligncenter" width="450"] Ken Griffin of Citadel Investment Group[/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 take a look at the key hedge fund action encompassing RCM Technologies, Inc. (NASDAQ:RCMT).
What does smart money think about RCM Technologies, Inc. (NASDAQ:RCMT)?
Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 50% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards RCMT over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in RCM Technologies, Inc. (NASDAQ:RCMT) was held by Renaissance Technologies, which reported holding $2.1 million worth of stock at the end of September. It was followed by Bourgeon Capital with a $0.6 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.
As aggregate interest increased, key hedge funds have been driving this bullishness. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in RCM Technologies, Inc. (NASDAQ:RCMT). Citadel Investment Group had $0 million invested in the company at the end of the quarter.
Let's go over hedge fund activity in other stocks similar to RCM Technologies, Inc. (NASDAQ:RCMT). These stocks are Mitcham Industries, Inc. (NASDAQ:MIND), Innovate Biopharmaceuticals, Inc. (NASDAQ:INNT), Retractable Technologies, Inc. (NYSE:RVP), and Bioanalytical Systems, Inc. (NASDAQ:BASI). All of these stocks' market caps match RCMT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MIND,4,10485,1 INNT,1,1336,-1 RVP,1,990,-1 BASI,1,1201,0 Average,1.75,3503,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 1.75 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $3 million in RCMT's case. Mitcham Industries, Inc. (NASDAQ:MIND) is the most popular stock in this table. On the other hand Innovate Biopharmaceuticals, Inc. (NASDAQ:INNT) is the least popular one with only 1 bullish hedge fund positions. RCM Technologies, Inc. (NASDAQ:RCMT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately RCMT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RCMT were disappointed as the stock returned -5.7% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.