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Did Hedge Funds Drop The Ball On FirstService Corporation (FSV) ?

Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That’s why we pay special attention to hedge fund activity in these stocks.

Hedge fund interest in FirstService Corporation (TSE:FSV) 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 FSV to other stocks including Quaker Chemical Corp (NYSE:KWR), Blueprint Medicines Corporation (NASDAQ:BPMC), and Red Rock Resorts, Inc. (NASDAQ:RRR) to get a better sense of its popularity.

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 32 percentage points since May 2014 through March 12, 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.

Blair Levinsky of Waratah Capital Advisors

Let’s analyze the latest hedge fund action encompassing FirstService Corporation (TSE:FSV).

What have hedge funds been doing with FirstService Corporation (TSE:FSV)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 9 hedge funds with a bullish position in FSV a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

FSV_apr2019

More specifically, Renaissance Technologies was the largest shareholder of FirstService Corporation (TSE:FSV), with a stake worth $64.2 million reported as of the end of September. Trailing Renaissance Technologies was Lionstone Capital Management, which amassed a stake valued at $17 million. Royce & Associates, Arrowstreet Capital, and Waratah Capital Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Springbok Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Marshall Wace LLP).

Let’s now take a look at hedge fund activity in other stocks similar to FirstService Corporation (TSE:FSV). These stocks are Quaker Chemical Corp (NYSE:KWR), Blueprint Medicines Corporation (NASDAQ:BPMC), Red Rock Resorts, Inc. (NASDAQ:RRR), and Hillenbrand, Inc. (NYSE:HI). This group of stocks’ market values are closest to FSV’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KWR 13 148763 2
BPMC 22 391311 -5
RRR 17 304726 -4
HI 18 50059 -2
Average 17.5 223715 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $224 million. That figure was $123 million in FSV’s case. Blueprint Medicines Corporation (NASDAQ:BPMC) is the most popular stock in this table. On the other hand Quaker Chemical Corp (NYSE:KWR) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks FirstService Corporation (TSE:FSV) is even less popular than KWR. Hedge funds clearly dropped the ball on FSV as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on FSV as the stock returned 27.9% and outperformed the market by an even larger margin.

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

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