Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) has experienced a decrease in support from the world's most elite money managers recently. Our calculations also showed that RBA 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 view the latest hedge fund action regarding Ritchie Bros. Auctioneers Incorporated (NYSE:RBA).
What does smart money think about Ritchie Bros. Auctioneers Incorporated (NYSE:RBA)?
Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards RBA over the last 16 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Royce & Associates held the most valuable stake in Ritchie Bros. Auctioneers Incorporated (NYSE:RBA), which was worth $51.8 million at the end of the second quarter. On the second spot was Balyasny Asset Management which amassed $19.5 million worth of shares. Moreover, Renaissance Technologies, Arrowstreet Capital, and D E Shaw were also bullish on Ritchie Bros. Auctioneers Incorporated (NYSE:RBA), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) has faced falling interest from the smart money, it's safe to say that there lies a certain "tier" of funds who sold off their full holdings heading into Q3. At the top of the heap, David Costen Haley's HBK Investments dumped the biggest stake of the "upper crust" of funds tracked by Insider Monkey, comprising close to $1.2 million in stock. Matthew Tewksbury's fund, Stevens Capital Management, also cut its stock, about $0.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks similar to Ritchie Bros. Auctioneers Incorporated (NYSE:RBA). These stocks are United Therapeutics Corporation (NASDAQ:UTHR), Envestnet Inc (NYSE:ENV), BRP Inc. (NASDAQ:DOOO), and Ultragenyx Pharmaceutical Inc (NASDAQ:RARE). This group of stocks' market values match RBA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UTHR,30,1010985,9 ENV,13,107070,-4 DOOO,10,73075,0 RARE,16,249429,-2 Average,17.25,360140,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $360 million. That figure was $126 million in RBA's case. United Therapeutics Corporation (NASDAQ:UTHR) is the most popular stock in this table. On the other hand BRP Inc. (NASDAQ:DOOO) is the least popular one with only 10 bullish hedge fund positions. Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on RBA as the stock returned 20.7% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.