Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% 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 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Sterling Construction Company, Inc. (NASDAQ:STRL) has experienced a decrease in hedge fund sentiment recently. Our calculations also showed that STRL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We're going to check out the fresh hedge fund action regarding Sterling Construction Company, Inc. (NASDAQ:STRL).
How are hedge funds trading Sterling Construction Company, Inc. (NASDAQ:STRL)?
Heading into the fourth quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in STRL a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
The largest stake in Sterling Construction Company, Inc. (NASDAQ:STRL) was held by Renaissance Technologies, which reported holding $26.8 million worth of stock at the end of September. It was followed by Royce & Associates with a $6.8 million position. Other investors bullish on the company included AQR Capital Management, Two Sigma Advisors, and Marshall Wace. In terms of the portfolio weights assigned to each position Algert Coldiron Investors allocated the biggest weight to Sterling Construction Company, Inc. (NASDAQ:STRL), around 0.16% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.06 percent of its 13F equity portfolio to STRL.
Due to the fact that Sterling Construction Company, Inc. (NASDAQ:STRL) has faced a decline in interest from the smart money, it's easy to see that there exists a select few hedge funds who sold off their entire stakes in the third quarter. Interestingly, Paul Hondros's AlphaOne Capital Partners cut the largest position of all the hedgies followed by Insider Monkey, worth an estimated $0.9 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund cut about $0.4 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 2 funds in the third quarter.
Let's go over hedge fund activity in other stocks similar to Sterling Construction Company, Inc. (NASDAQ:STRL). These stocks are Tuscan Holdings Corp. (NASDAQ:THCB), GenMark Diagnostics, Inc (NASDAQ:GNMK), Dermira Inc (NASDAQ:DERM), and Hallmark Financial Services, Inc. (NASDAQ:HALL). This group of stocks' market values resemble STRL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position THCB,12,55008,0 GNMK,15,74128,1 DERM,23,113476,2 HALL,12,40645,2 Average,15.5,70814,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $46 million in STRL's case. Dermira Inc (NASDAQ:DERM) is the most popular stock in this table. On the other hand Tuscan Holdings Corp. (NASDAQ:THCB) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Sterling Construction Company, Inc. (NASDAQ:STRL) is even less popular than THCB. Hedge funds clearly dropped the ball on STRL as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on STRL as the stock returned 10.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.