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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Heritage Insurance Holdings Inc (NYSE:HRTG).
Is HRTG a good stock to buy now? Prominent investors were turning less bullish. The number of long hedge fund bets retreated by 1 in recent months. Heritage Insurance Holdings Inc (NYSE:HRTG) was in 11 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 15. Our calculations also showed that HRTG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
To most shareholders, hedge funds are seen as worthless, old investment tools of yesteryear. While there are over 8000 funds in operation at present, We choose to focus on the masters of this group, around 850 funds. It is estimated that this group of investors oversee most of the smart money's total capital, and by watching their unrivaled stock picks, Insider Monkey has identified several investment strategies that have historically outstripped the broader indices. Insider Monkey's flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 13% since February 2017 (through November 17th) even though the market was up 65% during the same period. We just shared a list of 6 short targets in our latest quarterly update .
Chuck Royce of Royce & Associates
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind we're going to take a glance at the fresh hedge fund action surrounding Heritage Insurance Holdings Inc (NYSE:HRTG).
Do Hedge Funds Think HRTG Is A Good Stock To Buy Now?
At the end of September, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the previous quarter. On the other hand, there were a total of 10 hedge funds with a bullish position in HRTG a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Heritage Insurance Holdings Inc (NYSE:HRTG), with a stake worth $11.6 million reported as of the end of September. Trailing Royce & Associates was Rutabaga Capital Management, which amassed a stake valued at $6.7 million. Renaissance Technologies, Arrowstreet Capital, and Millennium Management were 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 Rutabaga Capital Management allocated the biggest weight to Heritage Insurance Holdings Inc (NYSE:HRTG), around 3.82% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.13 percent of its 13F equity portfolio to HRTG.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: PEAK6 Capital Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified HRTG as a viable investment and initiated a position in the stock.
Let's go over hedge fund activity in other stocks similar to Heritage Insurance Holdings Inc (NYSE:HRTG). We will take a look at SunCoke Energy, Inc (NYSE:SXC), Digimarc Corp (NASDAQ:DMRC), Paysign, Inc. (NASDAQ:PAYS), TravelCenters of America Inc. (NASDAQ:TA), Microvision, Inc. (NASDAQ:MVIS), Citizens, Inc. (NYSE:CIA), and Oppenheimer Holdings Inc. (NYSE:OPY). This group of stocks' market valuations match HRTG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SXC,19,61420,0 DMRC,6,26173,-1 PAYS,5,9896,0 TA,12,62213,5 MVIS,2,237,0 CIA,2,2160,0 OPY,10,20369,2 Average,8,26067,0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $30 million in HRTG's case. SunCoke Energy, Inc (NYSE:SXC) is the most popular stock in this table. On the other hand Microvision, Inc. (NASDAQ:MVIS) is the least popular one with only 2 bullish hedge fund positions. Heritage Insurance Holdings Inc (NYSE:HRTG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for HRTG is 52.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately HRTG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HRTG were disappointed as the stock returned 2.7% since the end of September (through 12/8) 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.
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Disclosure: None. This article was originally published at Insider Monkey.