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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cowen Inc. (NASDAQ:COWN) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in Cowen Inc. (NASDAQ:COWN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare COWN to other stocks including Domo Inc. (NASDAQ:DOMO), Unity Biotechnology, Inc. (NASDAQ:UBX), and Rimini Street, Inc. (NASDAQ:RMNI) to get a better sense of its popularity.
Video: 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 S&P 500 ETFs by more than 58 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. 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.
John Rogers of Ariel Investments
At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's take a gander at the fresh hedge fund action encompassing Cowen Inc. (NASDAQ:COWN).
How have hedgies been trading Cowen Inc. (NASDAQ:COWN)?
At Q1's end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in COWN over the last 18 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.
The largest stake in Cowen Inc. (NASDAQ:COWN) was held by Arbiter Partners Capital Management, which reported holding $16.4 million worth of stock at the end of September. It was followed by Ariel Investments with a $7.6 million position. Other investors bullish on the company included D E Shaw, Balyasny Asset Management, and Millennium Management. In terms of the portfolio weights assigned to each position Arbiter Partners Capital Management allocated the biggest weight to Cowen Inc. (NASDAQ:COWN), around 2.45% of its 13F portfolio. Azora Capital is also relatively very bullish on the stock, earmarking 0.81 percent of its 13F equity portfolio to COWN.
Judging by the fact that Cowen Inc. (NASDAQ:COWN) has experienced bearish sentiment from hedge fund managers, we can see that there lies a certain "tier" of money managers who were dropping their positions entirely in the first quarter. It's worth mentioning that Jeffrey Hinkle's Shoals Capital Management said goodbye to the biggest investment of the "upper crust" of funds tracked by Insider Monkey, totaling an estimated $2.9 million in stock. Ryan Tolkin (CIO)'s fund, Schonfeld Strategic Advisors, also sold off its stock, about $0.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Cowen Inc. (NASDAQ:COWN). These stocks are Domo Inc. (NASDAQ:DOMO), Unity Biotechnology, Inc. (NASDAQ:UBX), Rimini Street, Inc. (NASDAQ:RMNI), and Newtek Business Services Corp (NASDAQ:NEWT). This group of stocks' market caps match COWN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOMO,15,72386,-3 UBX,5,2370,-2 RMNI,7,132213,-2 NEWT,8,7880,1 Average,8.75,53712,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $55 million in COWN's case. Domo Inc. (NASDAQ:DOMO) is the most popular stock in this table. On the other hand Unity Biotechnology, Inc. (NASDAQ:UBX) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Cowen Inc. (NASDAQ:COWN) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on COWN as the stock returned 84.9% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.