Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 8.5 percentage points through November 22nd. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Hennessy Advisors, Inc. (NASDAQ:HNNA) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 3 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare HNNA to other stocks including American River Bankshares (NASDAQ:AMRB), Marinus Pharmaceuticals Inc (NASDAQ:MRNS), and Trevi Therapeutics, Inc. (NASDAQ:TRVI) to get a better sense of its popularity.
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' 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_341463" align="aligncenter" width="500"] Paul Isaac of Arbiter Partners Capital Management[/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 new hedge fund action encompassing Hennessy Advisors, Inc. (NASDAQ:HNNA).
What have hedge funds been doing with Hennessy Advisors, Inc. (NASDAQ:HNNA)?
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HNNA over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Hennessy Advisors, Inc. (NASDAQ:HNNA), which was worth $1.2 million at the end of the third quarter. On the second spot was Osmium Partners which amassed $0.7 million worth of shares. Arbiter Partners Capital Management 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 Osmium Partners allocated the biggest weight to Hennessy Advisors, Inc. (NASDAQ:HNNA), around 0.83% of its portfolio. Arbiter Partners Capital Management is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to HNNA.
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 also examine hedge fund activity in other stocks similar to Hennessy Advisors, Inc. (NASDAQ:HNNA). These stocks are American River Bankshares (NASDAQ:AMRB), Marinus Pharmaceuticals Inc (NASDAQ:MRNS), Trevi Therapeutics, Inc. (NASDAQ:TRVI), and Aquestive Therapeutics, Inc. (NASDAQ:AQST). All of these stocks' market caps are similar to HNNA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMRB,3,12289,0 MRNS,7,14518,-5 TRVI,2,835,-1 AQST,3,7355,-1 Average,3.75,8749,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 3.75 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $2 million in HNNA's case. Marinus Pharmaceuticals Inc (NASDAQ:MRNS) is the most popular stock in this table. On the other hand Trevi Therapeutics, Inc. (NASDAQ:TRVI) is the least popular one with only 2 bullish hedge fund positions. Hennessy Advisors, Inc. (NASDAQ:HNNA) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on HNNA, though not to the same extent, as the stock returned 6.1% during the fourth quarter (through 11/22) and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.