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Did Hedge Funds Drop The Ball On LCI Industries (LCII) ?

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Is LCI Industries (NYSE:LCII) worth your attention right now? Investors who are in the know are becoming less confident. The number of bullish hedge fund positions dropped by 4 recently. Our calculations also showed that LCII isn’t among the 30 most popular stocks among hedge funds. LCII was in 8 hedge funds’ portfolios at the end of December. There were 12 hedge funds in our database with LCII positions at the end of the previous quarter.

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.

Roger Ibbotson Zebra Capital

We’re going to take a look at the new hedge fund action surrounding LCI Industries (NYSE:LCII).

How are hedge funds trading LCI Industries (NYSE:LCII)?

Heading into the first quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -33% from the second quarter of 2018. On the other hand, there were a total of 9 hedge funds with a bullish position in LCII a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

LCII_apr2019

The largest stake in LCI Industries (NYSE:LCII) was held by Royce & Associates, which reported holding $53.7 million worth of stock at the end of December. It was followed by East Side Capital (RR Partners) with a $13.5 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Zebra Capital Management.

Since LCI Industries (NYSE:LCII) has witnessed bearish sentiment from the smart money, we can see that there is a sect of fund managers who sold off their full holdings in the third quarter. It’s worth mentioning that Jim Simons’s Renaissance Technologies sold off the largest position of the “upper crust” of funds watched by Insider Monkey, valued at close to $2.4 million in call options, and D. E. Shaw’s D E Shaw was right behind this move, as the fund cut about $1.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds in the third quarter.

Let’s go over hedge fund activity in other stocks similar to LCI Industries (NYSE:LCII). These stocks are Allscripts Healthcare Solutions Inc (NASDAQ:MDRX), Belden Inc. (NYSE:BDC), Everbridge, Inc. (NASDAQ:EVBG), and Shake Shack Inc (NYSE:SHAK). This group of stocks’ market valuations are similar to LCII’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MDRX 18 159101 -2
BDC 15 40502 5
EVBG 22 251142 3
SHAK 19 247116 -3
Average 18.5 174465 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $174 million. That figure was $80 million in LCII’s case. Everbridge, Inc. (NASDAQ:EVBG) is the most popular stock in this table. On the other hand Belden Inc. (NYSE:BDC) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks LCI Industries (NYSE:LCII) is even less popular than BDC. Hedge funds clearly dropped the ball on LCII 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 LCII as the stock returned 36.8% and outperformed the market by an even larger margin.

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

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