Did Hedge Funds Make The Right Call On Cavco Industries, Inc. (CVCO) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cavco Industries, Inc. (NASDAQ:CVCO) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Cavco Industries, Inc. (NASDAQ:CVCO) 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 CVCO to other stocks including Edgewell Personal Care Company (NYSE:EPC), BioTelemetry, Inc. (NASDAQ:BEAT), and Office Properties Income Trust (NASDAQ:OPI) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 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.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to take a look at the new hedge fund action regarding Cavco Industries, Inc. (NASDAQ:CVCO).

How have hedgies been trading Cavco Industries, Inc. (NASDAQ:CVCO)?

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. On the other hand, there were a total of 19 hedge funds with a bullish position in CVCO a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

More specifically, GAMCO Investors was the largest shareholder of Cavco Industries, Inc. (NASDAQ:CVCO), with a stake worth $38.5 million reported as of the end of September. Trailing GAMCO Investors was Broad Bay Capital, which amassed a stake valued at $31.2 million. Renaissance Technologies, Fisher Asset Management, and Royce & Associates were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Broad Bay Capital allocated the biggest weight to Cavco Industries, Inc. (NASDAQ:CVCO), around 8.57% of its 13F portfolio. Tontine Asset Management is also relatively very bullish on the stock, setting aside 0.7 percent of its 13F equity portfolio to CVCO.

Seeing as Cavco Industries, Inc. (NASDAQ:CVCO) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few hedgies who were dropping their full holdings by the end of the first quarter. It’s worth mentioning that Israel Englander’s Millennium Management sold off the largest stake of the “upper crust” of funds followed by Insider Monkey, comprising about $6.3 million in stock, and Mark McMeans’s Brasada Capital Management was right behind this move, as the fund dropped about $2.2 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cavco Industries, Inc. (NASDAQ:CVCO) but similarly valued. These stocks are Edgewell Personal Care Company (NYSE:EPC), BioTelemetry, Inc. (NASDAQ:BEAT), Office Properties Income Trust (NASDAQ:OPI), and Constellation Pharmaceuticals, Inc. (NASDAQ:CNST). All of these stocks’ market caps are closest to CVCO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EPC 25 176671 -1
BEAT 12 42629 -3
OPI 10 20479 1
CNST 25 427184 -2
Average 18 166741 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $122 million in CVCO’s case. Edgewell Personal Care Company (NYSE:EPC) is the most popular stock in this table. On the other hand Office Properties Income Trust (NASDAQ:OPI) is the least popular one with only 10 bullish hedge fund positions. Cavco Industries, Inc. (NASDAQ:CVCO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on CVCO, though not to the same extent, as the stock returned 31.9% since the end of March and outperformed the market as well.

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