Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Republic Bancorp, Inc. (NASDAQ:RBCAA) a buy right now? The smart money is becoming less hopeful. The number of bullish hedge fund bets were trimmed by 1 recently. Our calculations also showed that RBCAA isn't among the 30 most popular stocks among hedge funds (see the video below). RBCAA was in 6 hedge funds' portfolios at the end of June. There were 7 hedge funds in our database with RBCAA holdings at the end of the previous quarter. 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
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 analyze the latest hedge fund action regarding Republic Bancorp, Inc. (NASDAQ:RBCAA).
How have hedgies been trading Republic Bancorp, Inc. (NASDAQ:RBCAA)?
At the end of the second quarter, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RBCAA over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, Tontine Asset Management was the largest shareholder of Republic Bancorp, Inc. (NASDAQ:RBCAA), with a stake worth $6.6 million reported as of the end of March. Trailing Tontine Asset Management was Renaissance Technologies, which amassed a stake valued at $5 million. GLG Partners, Millennium Management, and Zebra Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Springbok Capital. 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 none of the 750+ hedge funds tracked by Insider Monkey identified RBCAA as a viable investment and initiated a position in the stock.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Republic Bancorp, Inc. (NASDAQ:RBCAA) but similarly valued. These stocks are Synaptics Incorporated (NASDAQ:SYNA), Methode Electronics Inc. (NYSE:MEI), Livent Corporation (NYSE:LTHM), and Glu Mobile Inc. (NASDAQ:GLUU). This group of stocks' market caps resemble RBCAA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SYNA,13,179495,-8 MEI,8,87043,-2 LTHM,21,167433,-4 GLUU,23,116556,-2 Average,16.25,137632,-4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $17 million in RBCAA's case. Glu Mobile Inc. (NASDAQ:GLUU) is the most popular stock in this table. On the other hand Methode Electronics Inc. (NYSE:MEI) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Republic Bancorp, Inc. (NASDAQ:RBCAA) is even less popular than MEI. Hedge funds dodged a bullet by taking a bearish stance towards RBCAA. 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 RBCAA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); RBCAA investors were disappointed as the stock returned -12.1% 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.
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