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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Clearfield, Inc. (NASDAQ:CLFD).
Clearfield, Inc. (NASDAQ:CLFD) was in 3 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 7. CLFD investors should pay attention to a decrease in activity from the world's largest hedge funds in recent months. There were 4 hedge funds in our database with CLFD positions at the end of the second quarter. Our calculations also showed that CLFD isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
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 66 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.
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website.With all of this in mind let's analyze the fresh hedge fund action regarding Clearfield, Inc. (NASDAQ:CLFD).
How have hedgies been trading Clearfield, Inc. (NASDAQ:CLFD)?
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 3 hedge funds with a bullish position in CLFD a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in Clearfield, Inc. (NASDAQ:CLFD) was held by Renaissance Technologies, which reported holding $12.1 million worth of stock at the end of September. It was followed by Royce & Associates with a $1.7 million position. The only other hedge fund that is bullish on the company was Citadel Investment Group.
Judging by the fact that Clearfield, Inc. (NASDAQ:CLFD) has experienced declining sentiment from the smart money, it's easy to see that there was a specific group of hedge funds who sold off their entire stakes heading into Q4. It's worth mentioning that Israel Englander's Millennium Management dropped the biggest stake of all the hedgies watched by Insider Monkey, totaling about $0.1 million in stock. Frederick DiSanto's fund, Ancora Advisors, also said goodbye to its stock, about $0 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Clearfield, Inc. (NASDAQ:CLFD) but similarly valued. These stocks are Independent Bank Corporation (NASDAQ:IBCP), Xeris Pharmaceuticals, Inc. (NASDAQ:XERS), Guaranty Bancshares, Inc. (NASDAQ:GNTY), Anavex Life Sciences Corp. (NASDAQ:AVXL), Bridgewater Bancshares, Inc. (NASDAQ:BWB), Yiren Digital Ltd. (NYSE:YRD), and Preferred Apartment Communities Inc. (NYSE:APTS). This group of stocks' market valuations are similar to CLFD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IBCP,13,24898,-1 XERS,13,49164,-7 GNTY,2,3343,0 AVXL,3,3308,-2 BWB,6,19703,-3 YRD,2,1534,1 APTS,10,5633,0 Average,7,15369,-1.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $14 million in CLFD's case. Independent Bank Corporation (NASDAQ:IBCP) is the most popular stock in this table. On the other hand Guaranty Bancshares, Inc. (NASDAQ:GNTY) is the least popular one with only 2 bullish hedge fund positions. Clearfield, Inc. (NASDAQ:CLFD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CLFD is 21.4. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 28.1% in 2020 through November 23rd and still beat the market by 15.4 percentage points. A small number of hedge funds were also right about betting on CLFD as the stock returned 15.7% since the end of the third quarter (through 11/23) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.