Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to James River Group Holdings Ltd (NASDAQ:JRVR) changed recently.
James River Group Holdings Ltd (NASDAQ:JRVR) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of September. At the end of this article we will also compare JRVR to other stocks including SunPower Corporation (NASDAQ:SPWR), Badger Meter, Inc. (NYSE:BMI), and Jagged Peak Energy Inc. (NYSE:JAG) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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_26073" align="alignnone" width="600"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a look at the fresh hedge fund action regarding James River Group Holdings Ltd (NASDAQ:JRVR).
How are hedge funds trading James River Group Holdings Ltd (NASDAQ:JRVR)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards JRVR over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in James River Group Holdings Ltd (NASDAQ:JRVR), which was worth $28.7 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $9.5 million worth of shares. Royce & Associates, Winton Capital Management, and Two Sigma Advisors 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 Driehaus Capital allocated the biggest weight to James River Group Holdings Ltd (NASDAQ:JRVR), around 0.31% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.27 percent of its 13F equity portfolio to JRVR.
Because James River Group Holdings Ltd (NASDAQ:JRVR) has experienced falling interest from the entirety of the hedge funds we track, it's safe to say that there is a sect of money managers who sold off their full holdings by the end of the third quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the largest stake of all the hedgies tracked by Insider Monkey, totaling about $0.5 million in stock. Ron Bobman's fund, Capital Returns Management, also cut its stock, about $0.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to James River Group Holdings Ltd (NASDAQ:JRVR). We will take a look at SunPower Corporation (NASDAQ:SPWR), Badger Meter, Inc. (NYSE:BMI), Jagged Peak Energy Inc. (NYSE:JAG), and Redfin Corporation (NASDAQ:RDFN). All of these stocks' market caps resemble JRVR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPWR,14,105625,4 BMI,17,142140,5 JAG,14,162814,1 RDFN,15,213466,5 Average,15,156011,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $156 million. That figure was $52 million in JRVR's case. Badger Meter, Inc. (NYSE:BMI) is the most popular stock in this table. On the other hand SunPower Corporation (NASDAQ:SPWR) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks James River Group Holdings Ltd (NASDAQ:JRVR) is even less popular than SPWR. Hedge funds dodged a bullet by taking a bearish stance towards JRVR. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately JRVR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); JRVR investors were disappointed as the stock returned -22.8% during the fourth quarter (through the end of November) 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.