Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Newtek Business Services, Corp. (NASDAQ:NEWT).
Newtek Business Services, Corp. (NASDAQ:NEWT) was in 5 hedge funds' portfolios at the end of the second quarter of 2019. NEWT investors should be aware of a decrease in support from the world's most elite money managers lately. There were 6 hedge funds in our database with NEWT positions at the end of the previous quarter. Our calculations also showed that NEWT isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a gander at the latest hedge fund action regarding Newtek Business Services, Corp.(NASDAQ:NEWT).
Hedge fund activity in Newtek Business Services, Corp. (NASDAQ:NEWT)
At Q2's end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the first quarter of 2019. By comparison, 4 hedge funds held shares or bullish call options in NEWT a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
The largest stake in Newtek Business Services, Corp. (NASDAQ:NEWT) was held by McKinley Capital Management, which reported holding $3.5 million worth of stock at the end of March. It was followed by Millennium Management with a $1.1 million position. Other investors bullish on the company included Driehaus Capital, Citadel Investment Group, and PEAK6 Capital Management.
Seeing as Newtek Business Services, Corp. (NASDAQ:NEWT) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few fund managers that decided to sell off their full holdings in the second quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP cut the biggest position of the 750 funds followed by Insider Monkey, totaling close to $0.7 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund dropped about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 1 funds in the second quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Newtek Business Services, Corp. (NASDAQ:NEWT) but similarly valued. These stocks are Noble Corporation plc (NYSE:NE), Scholar Rock Holding Corporation (NASDAQ:SRRK), PAR Technology Corporation (NYSE:PAR), and Azure Power Global Limited (NYSE:AZRE). This group of stocks' market caps match NEWT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NE,16,67086,-7 SRRK,8,52673,3 PAR,5,31863,-1 AZRE,6,9530,0 Average,8.75,40288,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $7 million in NEWT's case. Noble Corporation plc (NYSE:NE) is the most popular stock in this table. On the other hand PAR Technology Corporation (NYSE:PAR) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Newtek Business Services, Corp.(NASDAQ:NEWT) is even less popular than PAR. Hedge funds dodged a bullet by taking a bearish stance towards NEWT. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately NEWT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); NEWT investors were disappointed as the stock returned 0.6% during the third quarter 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.