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In this article we are going to use hedge fund sentiment as a tool and determine whether RLI Corp. (NYSE:RLI) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is RLI a good stock to buy now? RLI Corp. (NYSE:RLI) has experienced an increase in activity from the world's largest hedge funds in recent months. RLI Corp. (NYSE:RLI) was in 22 hedge funds' portfolios at the end of September. The all time high for this statistic is 25. Our calculations also showed that RLI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Tom Gayner of Markel Gayner Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let's go over the new hedge fund action surrounding RLI Corp. (NYSE:RLI).
Do Hedge Funds Think RLI Is A Good Stock To Buy Now?
At Q3's end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in RLI a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Markel Gayner Asset Management held the most valuable stake in RLI Corp. (NYSE:RLI), which was worth $100.2 million at the end of the third quarter. On the second spot was Polar Capital which amassed $21.4 million worth of shares. Millennium Management, Royce & Associates, and ExodusPoint Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to RLI Corp. (NYSE:RLI), around 1.7% of its 13F portfolio. Polar Capital is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to RLI.
As industrywide interest jumped, specific money managers have jumped into RLI Corp. (NYSE:RLI) headfirst. ExodusPoint Capital, managed by Michael Gelband, created the most outsized position in RLI Corp. (NYSE:RLI). ExodusPoint Capital had $6.1 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also initiated a $1.3 million position during the quarter. The following funds were also among the new RLI investors: Dmitry Balyasny's Balyasny Asset Management, Greg Eisner's Engineers Gate Manager, and Paul Tudor Jones's Tudor Investment Corp.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as RLI Corp. (NYSE:RLI) but similarly valued. These stocks are Harley-Davidson, Inc. (NYSE:HOG), KB Home (NYSE:KBH), Switch, Inc. (NYSE:SWCH), Murphy USA Inc. (NYSE:MUSA), Terreno Realty Corporation (NYSE:TRNO), NewMarket Corporation (NYSE:NEU), and Marriott Vacations Worldwide Corporation (NYSE:VAC). This group of stocks' market caps are similar to RLI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HOG,32,490737,2 KBH,23,311311,0 SWCH,22,312020,0 MUSA,23,314514,-4 TRNO,15,38109,6 NEU,17,109363,-4 VAC,17,375694,-7 Average,21.3,278821,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.3 hedge funds with bullish positions and the average amount invested in these stocks was $279 million. That figure was $184 million in RLI's case. Harley-Davidson, Inc. (NYSE:HOG) is the most popular stock in this table. On the other hand Terreno Realty Corporation (NYSE:TRNO) is the least popular one with only 15 bullish hedge fund positions. RLI Corp. (NYSE:RLI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RLI is 54. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on RLI as the stock returned 21.7% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.