At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Live Oak Bancshares Inc (NASDAQ:LOB) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Hedge fund interest in Live Oak Bancshares Inc (NASDAQ:LOB) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Goldman Sachs BDC, Inc. (NYSE:GSBD), Forestar Group Inc. (NYSE:FOR), and AC Immune SA (NASDAQ:ACIU) to gather more data points. Our calculations also showed that LOB isn't among the 30 most popular stocks among hedge funds (click for Q1 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.
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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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_758429" align="aligncenter" width="400"] Ric Dillon of Diamond Hill Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a gander at the new hedge fund action encompassing Live Oak Bancshares Inc (NASDAQ:LOB).
How have hedgies been trading Live Oak Bancshares Inc (NASDAQ:LOB)?
At Q1's end, a total of 10 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 LOB over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Live Oak Bancshares Inc (NASDAQ:LOB) was held by Mendon Capital Advisors, which reported holding $12.5 million worth of stock at the end of September. It was followed by Azora Capital with a $5 million position. Other investors bullish on the company included Diamond Hill Capital, Select Equity Group, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Mendon Capital Advisors allocated the biggest weight to Live Oak Bancshares Inc (NASDAQ:LOB), around 6.13% of its 13F portfolio. Azora Capital is also relatively very bullish on the stock, setting aside 1.95 percent of its 13F equity portfolio to LOB.
Judging by the fact that Live Oak Bancshares Inc (NASDAQ:LOB) has faced falling interest from hedge fund managers, we can see that there was a specific group of hedge funds that elected to cut their full holdings by the end of the first quarter. It's worth mentioning that Israel Englander's Millennium Management cut the largest investment of all the hedgies tracked by Insider Monkey, comprising about $8.5 million in stock, and Renaissance Technologies was right behind this move, as the fund sold off about $0.5 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Live Oak Bancshares Inc (NASDAQ:LOB) but similarly valued. We will take a look at Goldman Sachs BDC, Inc. (NYSE:GSBD), Forestar Group Inc. (NYSE:FOR), AC Immune SA (NASDAQ:ACIU), and HudBay Minerals Inc (NYSE:HBM). This group of stocks' market values resemble LOB's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GSBD,1,1946,-1 FOR,7,52227,-5 ACIU,11,97191,1 HBM,8,102094,-3 Average,6.75,63365,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $25 million in LOB's case. AC Immune SA (NASDAQ:ACIU) is the most popular stock in this table. On the other hand Goldman Sachs BDC, Inc. (NYSE:GSBD) is the least popular one with only 1 bullish hedge fund positions. Live Oak Bancshares Inc (NASDAQ:LOB) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately LOB wasn't nearly as popular as these 10 stocks and hedge funds that were betting on LOB were disappointed as the stock returned 16.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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.