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Were Hedge Funds Right About Souring On Royal Gold, Inc (RGLD)?

Reymerlyn Martin

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space.

Is Royal Gold, Inc (NASDAQ:RGLD) the right investment to pursue these days? Hedge funds are reducing their bets on the stock. The number of bullish hedge fund bets decreased by 2 in recent months. Our calculations also showed that RGLD isn't among the 30 most popular stocks among hedge funds. RGLD was in 15 hedge funds' portfolios at the end of December. There were 17 hedge funds in our database with RGLD positions at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

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Let's take a look at the key hedge fund action encompassing Royal Gold, Inc (NASDAQ:RGLD).

How are hedge funds trading Royal Gold, Inc (NASDAQ:RGLD)?

At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the second quarter of 2018. On the other hand, there were a total of 20 hedge funds with a bullish position in RGLD a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

RGLD_apr2019

According to Insider Monkey's hedge fund database, Horizon Asset Management, managed by Murray Stahl, holds the most valuable position in Royal Gold, Inc (NASDAQ:RGLD). Horizon Asset Management has a $22.2 million position in the stock, comprising 0.7% of its 13F portfolio. Coming in second is PEAK6 Capital Management, led by Matthew Hulsizer, holding a $14.3 million call position; 0.1% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions encompass Ken Griffin's Citadel Investment Group, John Overdeck and David Siegel's Two Sigma Advisors and D. E. Shaw's D E Shaw.

Due to the fact that Royal Gold, Inc (NASDAQ:RGLD) has faced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there is a sect of funds who sold off their positions entirely in the third quarter. At the top of the heap, Israel Englander's Millennium Management said goodbye to the largest stake of all the hedgies tracked by Insider Monkey, valued at an estimated $16.5 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund sold off about $11.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 2 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to Royal Gold, Inc (NASDAQ:RGLD). We will take a look at Jefferies Financial Group Inc. (NYSE:JEF), WABCO Holdings Inc. (NYSE:WBC), CyrusOne Inc (NASDAQ:CONE), and Axalta Coating Systems Ltd (NYSE:AXTA). This group of stocks' market valuations resemble RGLD's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JEF,36,607137,-3 WBC,14,515831,-1 CONE,14,124203,-10 AXTA,35,1927274,-8 Average,24.75,793611,-5.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $794 million. That figure was $58 million in RGLD's case. Jefferies Financial Group Inc. (NYSE:JEF) is the most popular stock in this table. On the other hand WABCO Holdings Inc. (NYSE:WBC) is the least popular one with only 14 bullish hedge fund positions. Royal Gold, Inc (NASDAQ:RGLD) 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately RGLD wasn't in this group. Hedge funds that bet on RGLD were disappointed as the stock returned 10.3% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.

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

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