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Were Hedge Funds Right About Cardiovascular Systems Inc (CSII)?

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In this article we will check out the progression of hedge fund sentiment towards Cardiovascular Systems Inc (NASDAQ:CSII) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Cardiovascular Systems Inc (NASDAQ:CSII) investors should be aware of a decrease in hedge fund sentiment in recent months. Cardiovascular Systems Inc (NASDAQ:CSII) was in 16 hedge funds' portfolios at the end of March. The all time high for this statistic is 22. There were 18 hedge funds in our database with CSII positions at the end of the fourth quarter. Our calculations also showed that CSII isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by 115 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 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.

Peter Algert of Algert Global

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Keeping this in mind we're going to take a look at the recent hedge fund action surrounding Cardiovascular Systems Inc (NASDAQ:CSII).

Do Hedge Funds Think CSII Is A Good Stock To Buy Now?

At first quarter's end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in CSII a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CSII A Good Stock To Buy?
Is CSII A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, RGM Capital, managed by Robert G. Moses, holds the biggest position in Cardiovascular Systems Inc (NASDAQ:CSII). RGM Capital has a $62.2 million position in the stock, comprising 2.7% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $42.5 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that are bullish consist of Nathan Fischel's DAFNA Capital Management, Ken Griffin's Citadel Investment Group and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position RGM Capital allocated the biggest weight to Cardiovascular Systems Inc (NASDAQ:CSII), around 2.72% of its 13F portfolio. DAFNA Capital Management is also relatively very bullish on the stock, setting aside 1.36 percent of its 13F equity portfolio to CSII.

Because Cardiovascular Systems Inc (NASDAQ:CSII) has faced falling interest from the aggregate hedge fund industry, it's easy to see that there is a sect of money managers that slashed their full holdings by the end of the first quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP dumped the biggest stake of the 750 funds monitored by Insider Monkey, comprising about $2.5 million in stock, and Lee Ainslie's Maverick Capital was right behind this move, as the fund said goodbye to about $0.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 2 funds by the end of the first quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Cardiovascular Systems Inc (NASDAQ:CSII) but similarly valued. These stocks are Schweitzer-Mauduit International, Inc. (NYSE:SWM), Controladora Vuela Co Avcn SA CV (NYSE:VLRS), Griffon Corporation (NYSE:GFF), B. Riley Financial, Inc. (NASDAQ:RILY), SunOpta, Inc. (NASDAQ:STKL), AlloVir, Inc. (NASDAQ:ALVR), and trivago N.V. (NASDAQ:TRVG). This group of stocks' market caps match CSII's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SWM,7,11043,-1 VLRS,14,172924,-5 GFF,13,197929,-5 RILY,25,189137,9 STKL,21,633044,7 ALVR,9,121353,1 TRVG,10,84965,2 Average,14.1,201485,1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.1 hedge funds with bullish positions and the average amount invested in these stocks was $201 million. That figure was $126 million in CSII's case. B. Riley Financial, Inc. (NASDAQ:RILY) is the most popular stock in this table. On the other hand Schweitzer-Mauduit International, Inc. (NYSE:SWM) is the least popular one with only 7 bullish hedge fund positions. Cardiovascular Systems Inc (NASDAQ:CSII) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CSII is 49.8. 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market again by 10.1 percentage points. Unfortunately CSII wasn't nearly as popular as these 5 stocks and hedge funds that were betting on CSII were disappointed as the stock returned 2.3% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.