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Were Hedge Funds Right About Selling Sterling Construction Company, Inc. (STRL)?

Asma UL Husna

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 750 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Sterling Construction Company, Inc. (NASDAQ:STRL) in this article.

Sterling Construction Company, Inc. (NASDAQ:STRL) was in 14 hedge funds' portfolios at the end of June. STRL investors should be aware of a decrease in activity from the world's largest hedge funds recently. There were 15 hedge funds in our database with STRL holdings at the end of the previous quarter. Our calculations also showed that STRL 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.

5 Most Popular Stocks Among Hedge Funds

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 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.

STRL_oct2019

Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We're going to check out the key hedge fund action regarding Sterling Construction Company, Inc. (NASDAQ:STRL).

How are hedge funds trading Sterling Construction Company, Inc. (NASDAQ:STRL)?

At Q2's end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STRL over the last 16 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Roger Ibbotson Zebra Capital

The largest stake in Sterling Construction Company, Inc. (NASDAQ:STRL) was held by Renaissance Technologies, which reported holding $27.5 million worth of stock at the end of March. It was followed by Royce & Associates with a $6.3 million position. Other investors bullish on the company included Two Sigma Advisors, Arrowstreet Capital, and Millennium Management.

Due to the fact that Sterling Construction Company, Inc. (NASDAQ:STRL) has faced bearish sentiment from hedge fund managers, it's safe to say that there was a specific group of fund managers that decided to sell off their entire stakes last quarter. At the top of the heap, Richard Driehaus's Driehaus Capital dropped the biggest position of the 750 funds watched by Insider Monkey, totaling close to $4.1 million in stock, and Jeffrey Talpins's Element Capital Management was right behind this move, as the fund dumped about $0.3 million worth. These moves are interesting, as aggregate hedge fund interest fell by 1 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Sterling Construction Company, Inc. (NASDAQ:STRL). These stocks are Health Insurance Innovations Inc (NASDAQ:HIIQ), The Container Store Group, Inc. (NYSE:TCS), Diana Shipping Inc. (NYSE:DSX), and Genco Shipping & Trading Limited (NYSE:GNK). This group of stocks' market caps are similar to STRL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HIIQ,19,130570,-3 TCS,18,23709,6 DSX,9,23161,1 GNK,12,194251,0 Average,14.5,92923,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $45 million in STRL's case. Health Insurance Innovations Inc (NASDAQ:HIIQ) is the most popular stock in this table. On the other hand Diana Shipping Inc. (NYSE:DSX) is the least popular one with only 9 bullish hedge fund positions. Sterling Construction Company, Inc. (NASDAQ:STRL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately STRL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STRL investors were disappointed as the stock returned -2% during the third 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 many of these stocks already outperformed the market so far in 2019.

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

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