It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC).
Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds' portfolios at the end of the second quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as The St. Joe Company (NYSE:JOE), Primoris Services Corp (NASDAQ:PRIM), and Tactile Systems Technology, Inc. (NASDAQ:TCMD) to gather more data points. Our calculations also showed that TRHC 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.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
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 analyze the recent hedge fund action encompassing Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC).
What have hedge funds been doing with Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC)?
At the end of the second quarter, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in TRHC a year ago. With the smart money's sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), with a stake worth $16.3 million reported as of the end of March. Trailing Royce & Associates was Osterweis Capital Management, which amassed a stake valued at $6 million. Venator Capital Management, Engle Capital, and PEAK6 Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) has experienced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of funds who sold off their full holdings in the second quarter. It's worth mentioning that Joel Greenblatt's Gotham Asset Management sold off the biggest position of all the hedgies tracked by Insider Monkey, comprising about $0.4 million in stock, and Robert B. Gillam's McKinley Capital Management was right behind this move, as the fund dropped about $0.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks similar to Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC). We will take a look at The St. Joe Company (NYSE:JOE), Primoris Services Corp (NASDAQ:PRIM), Tactile Systems Technology, Inc. (NASDAQ:TCMD), and Big Lots, Inc. (NYSE:BIG). This group of stocks' market valuations are closest to TRHC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JOE,12,506445,-1 PRIM,12,30523,2 TCMD,15,60665,-2 BIG,20,117046,0 Average,14.75,178670,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $179 million. That figure was $33 million in TRHC's case. Big Lots, Inc. (NYSE:BIG) is the most popular stock in this table. On the other hand The St. Joe Company (NYSE:JOE) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) is even less popular than JOE. Hedge funds clearly dropped the ball on TRHC 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 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 TRHC as the stock returned 10% during the third quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.