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 Northwest Pipe Company (NASDAQ:NWPX) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Northwest Pipe Company (NASDAQ:NWPX) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 13 hedge funds' portfolios at the end of the first quarter of 2020. At the end of this article we will also compare NWPX to other stocks including Aduro BioTech Inc (NASDAQ:ADRO), American Renal Associates Holdings, Inc (NYSE:ARA), and Fly Leasing Ltd (NYSE:FLY) to get a better sense of its popularity. Video: 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 S&P 500 ETFs by 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.
[caption id="attachment_140292" align="aligncenter" width="400"] Israel Englander of Millennium Management[/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. With all of this in mind we're going to take a look at the key hedge fund action surrounding Northwest Pipe Company (NASDAQ:NWPX).
How have hedgies been trading Northwest Pipe Company (NASDAQ:NWPX)?
At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in NWPX a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Chuck Royce's Royce & Associates has the number one position in Northwest Pipe Company (NASDAQ:NWPX), worth close to $16.5 million, comprising 0.2% of its total 13F portfolio. The second largest stake is held by Brightlight Capital, managed by Vadim Rubinchik, which holds a $8.6 million position; 6.6% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism include Paul Marshall and Ian Wace's Marshall Wace LLP, Ken Griffin's Citadel Investment Group and Prem Watsa's Fairfax Financial Holdings. In terms of the portfolio weights assigned to each position Brightlight Capital allocated the biggest weight to Northwest Pipe Company (NASDAQ:NWPX), around 6.62% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, earmarking 0.75 percent of its 13F equity portfolio to NWPX.
Due to the fact that Northwest Pipe Company (NASDAQ:NWPX) has experienced falling interest from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds who were dropping their positions entirely last quarter. At the top of the heap, Israel Englander's Millennium Management cut the biggest stake of the "upper crust" of funds followed by Insider Monkey, valued at close to $2 million in stock, and Ken Grossman and Glen Schneider's SG Capital Management was right behind this move, as the fund sold off about $1.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Northwest Pipe Company (NASDAQ:NWPX). We will take a look at Aduro BioTech Inc (NASDAQ:ADRO), American Renal Associates Holdings, Inc (NYSE:ARA), Fly Leasing Ltd (NYSE:FLY), and Eros International plc (NYSE:EROS). This group of stocks' market caps are similar to NWPX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADRO,11,41439,2 ARA,6,124445,0 FLY,13,23610,-1 EROS,8,18249,-3 Average,9.5,51936,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $35 million in NWPX's case. Fly Leasing Ltd (NYSE:FLY) is the most popular stock in this table. On the other hand American Renal Associates Holdings, Inc (NYSE:ARA) is the least popular one with only 6 bullish hedge fund positions. Northwest Pipe Company (NASDAQ:NWPX) 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately NWPX wasn't nearly as popular as these 10 stocks and hedge funds that were betting on NWPX were disappointed as the stock returned 7.1% 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.
Disclosure: None. This article was originally published at Insider Monkey.