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Did Hedge Funds Drop The Ball On Vectrus Inc (VEC) ?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Vectrus Inc (NYSE:VEC)? The smart money sentiment can provide an answer to this question.

Vectrus Inc (NYSE:VEC) has seen an increase in activity from the world’s largest hedge funds lately. VEC was in 11 hedge funds’ portfolios at the end of March. There were 10 hedge funds in our database with VEC holdings at the end of the previous quarter. Our calculations also showed that VEC isn’t among the 30 most popular stocks among hedge funds.

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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Bruce Kovner, Caxton Associates LP

We’re going to take a look at the key hedge fund action encompassing Vectrus Inc (NYSE:VEC).

What have hedge funds been doing with Vectrus Inc (NYSE:VEC)?

At Q1’s end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the fourth quarter of 2018. By comparison, 13 hedge funds held shares or bullish call options in VEC 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.

VEC_june2019

The largest stake in Vectrus Inc (NYSE:VEC) was held by AQR Capital Management, which reported holding $13.1 million worth of stock at the end of March. It was followed by GLG Partners with a $9.1 million position. Other investors bullish on the company included D E Shaw, Marshall Wace LLP, and Renaissance Technologies.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in Vectrus Inc (NYSE:VEC). Arrowstreet Capital had $1.1 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates LP also made a $0.2 million investment in the stock during the quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Vectrus Inc (NYSE:VEC) but similarly valued. These stocks are Marker Therapeutics, Inc. (NASDAQ:MRKR), Tile Shop Holdings, Inc. (NASDAQ:TTS), Graf Industrial Corp. (NYSE:GRAF), and Syros Pharmaceuticals, Inc. (NASDAQ:SYRS). This group of stocks’ market valuations match VEC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRKR 10 36537 2
TTS 8 19047 -2
GRAF 12 52624 0
SYRS 8 45634 -2
Average 9.5 38461 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $40 million in VEC’s case. Graf Industrial Corp. (NYSE:GRAF) is the most popular stock in this table. On the other hand Tile Shop Holdings, Inc. (NASDAQ:TTS) is the least popular one with only 8 bullish hedge fund positions. Vectrus Inc (NYSE:VEC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on VEC as the stock returned 42.2% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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