Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 4 percentage points through September 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Is ShotSpotter, Inc. (NASDAQ:SSTI) the right investment to pursue these days? Hedge funds are taking a bearish view. The number of long hedge fund positions decreased by 1 in recent months. Our calculations also showed that SSTI isn't among the 30 most popular stocks among hedge funds (see the video below). SSTI was in 6 hedge funds' portfolios at the end of June. There were 7 hedge funds in our database with SSTI 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.
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. Let's review the key hedge fund action surrounding ShotSpotter, Inc. (NASDAQ:SSTI).
How are hedge funds trading ShotSpotter, Inc. (NASDAQ:SSTI)?
Heading into the third quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the first quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in SSTI a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Manatuck Hill Partners was the largest shareholder of ShotSpotter, Inc. (NASDAQ:SSTI), with a stake worth $9.6 million reported as of the end of March. Trailing Manatuck Hill Partners was Driehaus Capital, which amassed a stake valued at $7.1 million. Millennium Management, G2 Investment Partners Management, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.
Because ShotSpotter, Inc. (NASDAQ:SSTI) has witnessed declining sentiment from the smart money, logic holds that there exists a select few hedgies who were dropping their entire stakes heading into Q3. It's worth mentioning that Ken Griffin's Citadel Investment Group dropped the largest stake of the "upper crust" of funds watched by Insider Monkey, valued at about $0.7 million in stock, and Jim Simons's Renaissance Technologies was right behind this move, as the fund sold off about $0.6 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds heading into Q3.
Let's go over hedge fund activity in other stocks similar to ShotSpotter, Inc. (NASDAQ:SSTI). These stocks are UMH Properties, Inc (NYSE:UMH), City Office REIT Inc (NYSE:CIO), Waitr Holdings Inc. (NASDAQ:WTRH), and Napco Security Technologies Inc (NASDAQ:NSSC). This group of stocks' market values are similar to SSTI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UMH,9,13264,0 CIO,6,24486,1 WTRH,17,135233,-5 NSSC,5,12007,-2 Average,9.25,46248,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $23 million in SSTI's case. Waitr Holdings Inc. (NASDAQ:WTRH) is the most popular stock in this table. On the other hand Napco Security Technologies Inc (NASDAQ:NSSC) is the least popular one with only 5 bullish hedge fund positions. ShotSpotter, Inc. (NASDAQ:SSTI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately SSTI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SSTI investors were disappointed as the stock returned -47.9% 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.