A market correction in the fourth quarter, spurred by a number of global macroeconomic concerns and rising interest rates ended up having a negative impact on the markets and many hedge funds as a result. The stocks of smaller companies were especially hard hit during this time as investors fled to investments seen as being safer. This is evident in the fact that the Russell 2,000 ETF underperformed the S&P 500 ETF by 4 percentage points during the first half of the fourth quarter. We also received indications that hedge funds were trimming their positions amid the market volatility and uncertainty, and given their greater inclination towards smaller cap stocks than other investors, it follows that a stronger sell-off occurred in those stocks. Let's study the hedge fund sentiment to see how those concerns affected their ownership of Rite Aid Corporation (NYSE:RAD) during the quarter.
Is Rite Aid Corporation (NYSE:RAD) worth your attention right now? The smart money is in an optimistic mood. The number of bullish hedge fund positions went up by 1 lately. Our calculations also showed that RAD isn't among the 30 most popular stocks among hedge funds. RAD was in 18 hedge funds' portfolios at the end of September. There were 17 hedge funds in our database with RAD holdings at the end of the previous quarter.
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 the 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 18 percentage points since May 2014 through December 3, 2018 (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.
We're going to go over the fresh hedge fund action regarding Rite Aid Corporation (NYSE:RAD).
How are hedge funds trading Rite Aid Corporation (NYSE:RAD)?
At Q3's end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. By comparison, 26 hedge funds held shares or bullish call options in RAD heading into this year. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Highfields Capital Management was the largest shareholder of Rite Aid Corporation (NYSE:RAD), with a stake worth $39.1 million reported as of the end of September. Trailing Highfields Capital Management was Adage Capital Management, which amassed a stake valued at $7.7 million. Millennium Management, GAMCO Investors, and Balyasny Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key money managers were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most outsized position in Rite Aid Corporation (NYSE:RAD). Balyasny Asset Management had $2.2 million invested in the company at the end of the quarter. Benjamin A. Smith's Laurion Capital Management also initiated a $1.1 million position during the quarter. The following funds were also among the new RAD investors: Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Michael Platt and William Reeves's BlueCrest Capital Mgmt., and Daniel S. Och's OZ Management.
Let's now review hedge fund activity in other stocks similar to Rite Aid Corporation (NYSE:RAD). These stocks are Safety Insurance Group, Inc. (NASDAQ:SAFT), Tennant Company (NYSE:TNC), The Simply Good Foods Company (NASDAQ:SMPL), and X Financial (NYSE:XYF). This group of stocks' market values match RAD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SAFT,11,43239,2 TNC,11,98956,5 SMPL,23,238082,-2 XYF,4,7649,4 Average,12.25,97,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $97 million. That figure was $63 million in RAD's case. The Simply Good Foods Company (NASDAQ:SMPL) is the most popular stock in this table. On the other hand 0 is the least popular one with only 4 bullish hedge fund positions. Rite Aid Corporation (NYSE:RAD) 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. In this regard SMPL might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.