Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like TPI Composites, Inc. (NASDAQ:TPIC).
Is TPI Composites, Inc. (NASDAQ:TPIC) a buy right now? Investors who are in the know are taking a pessimistic view. The number of long hedge fund bets dropped by 2 in recent months. Our calculations also showed that TPIC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). TPIC was in 14 hedge funds' portfolios at the end of the third quarter of 2019. There were 16 hedge funds in our database with TPIC positions 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 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.
[caption id="attachment_25717" align="aligncenter" width="440"] Steven Cohen of Point72 Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the key hedge fund action surrounding TPI Composites, Inc. (NASDAQ:TPIC).
How are hedge funds trading TPI Composites, Inc. (NASDAQ:TPIC)?
Heading into the fourth quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards TPIC over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Redwood Capital Management held the most valuable stake in TPI Composites, Inc. (NASDAQ:TPIC), which was worth $19.3 million at the end of the third quarter. On the second spot was Parian Global Management which amassed $18.8 million worth of shares. Arosa Capital Management, Inherent Group, and Point72 Asset Management 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 Inherent Group allocated the biggest weight to TPI Composites, Inc. (NASDAQ:TPIC), around 14.33% of its 13F portfolio. Parian Global Management is also relatively very bullish on the stock, earmarking 8.54 percent of its 13F equity portfolio to TPIC.
Seeing as TPI Composites, Inc. (NASDAQ:TPIC) has experienced declining sentiment from the smart money, it's easy to see that there exists a select few fund managers that decided to sell off their positions entirely heading into Q4. It's worth mentioning that Douglas T. Granat's Trigran Investments dropped the largest stake of the "upper crust" of funds watched by Insider Monkey, comprising about $48.4 million in stock, and Ian Cumming and Joseph Steinberg's Leucadia National was right behind this move, as the fund said goodbye to about $2.2 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 2 funds heading into Q4.
Let's now review hedge fund activity in other stocks similar to TPI Composites, Inc. (NASDAQ:TPIC). We will take a look at Peoples Bancorp Inc. (NASDAQ:PEBO), CEVA, Inc. (NASDAQ:CEVA), Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW), and Tredegar Corporation (NYSE:TG). This group of stocks' market valuations are similar to TPIC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PEBO,7,27640,0 CEVA,10,28922,0 AAWW,13,28330,-3 TG,12,73036,1 Average,10.5,39482,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $39 million. That figure was $98 million in TPIC's case. Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is the most popular stock in this table. On the other hand Peoples Bancorp Inc. (NASDAQ:PEBO) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks TPI Composites, Inc. (NASDAQ:TPIC) is more popular among hedge funds. 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. Unfortunately TPIC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TPIC were disappointed as the stock returned -3.7% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.