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After several tireless days we have finished crunching the numbers from nearly 817 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms' equity portfolios as of September 30th. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Live Oak Bancshares Inc (NASDAQ:LOB).
Is LOB a good stock to buy now? Live Oak Bancshares Inc (NASDAQ:LOB) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of the third quarter of 2020. Our calculations also showed that LOB 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). 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 Universal Corp (NYSE:UVV), Lithium Americas Corp. (NYSE:LAC), and The ODP Corporation (NYSE:ODP) to gather more data points.
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 66 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.
Richard Driehaus of Driehaus Capital
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 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. 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. Now we're going to check out the recent hedge fund action surrounding Live Oak Bancshares Inc (NASDAQ:LOB).
Do Hedge Funds Think LOB Is A Good Stock To Buy Now?
At Q3's end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in LOB a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Richard Driehaus's Driehaus Capital has the number one position in Live Oak Bancshares Inc (NASDAQ:LOB), worth close to $16 million, accounting for 0.3% of its total 13F portfolio. Coming in second is Mendon Capital Advisors, led by Anton Schutz, holding a $14.6 million position; the fund has 8.5% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism contain Ric Dillon's Diamond Hill Capital, Robert Joseph Caruso's Select Equity Group and Matthew Hulsizer's PEAK6 Capital Management. 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 8.5% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, designating 0.33 percent of its 13F equity portfolio to LOB.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Arbiter Partners 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).
Let's now take a look at hedge fund activity in other stocks similar to Live Oak Bancshares Inc (NASDAQ:LOB). These stocks are Universal Corp (NYSE:UVV), Lithium Americas Corp. (NYSE:LAC), The ODP Corporation (NYSE:ODP), TPI Composites, Inc. (NASDAQ:TPIC), Covanta Holding Corporation (NYSE:CVA), Malibu Boats Inc (NASDAQ:MBUU), and Ferro Corporation (NYSE:FOE). This group of stocks' market valuations are similar to LOB's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UVV,12,74834,-1 LAC,3,3349,2 ODP,18,182264,0 TPIC,20,103800,7 CVA,23,79339,2 MBUU,19,119790,0 FOE,15,145226,-3 Average,15.7,101229,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.7 hedge funds with bullish positions and the average amount invested in these stocks was $101 million. That figure was $41 million in LOB's case. Covanta Holding Corporation (NYSE:CVA) is the most popular stock in this table. On the other hand Lithium Americas Corp. (NYSE:LAC) is the least popular one with only 3 bullish hedge fund positions. Live Oak Bancshares Inc (NASDAQ:LOB) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for LOB is 49.8. 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. 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 still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on LOB as the stock returned 65.8% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.