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Did Hedge Funds Make The Right Call On Cubic Corporation (CUB) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Cubic Corporation (NYSE:CUB) and determine whether hedge funds skillfully traded this stock.

Cubic Corporation (NYSE:CUB) was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. CUB has seen a decrease in hedge fund sentiment in recent months. There were 19 hedge funds in our database with CUB holdings at the end of the previous quarter. Our calculations also showed that CUB isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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. 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.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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 check out the key hedge fund action regarding Cubic Corporation (NYSE:CUB).

What does smart money think about Cubic Corporation (NYSE:CUB)?

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CUB over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Among these funds, Value Holdings LP held the most valuable stake in Cubic Corporation (NYSE:CUB), which was worth $4.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $4 million worth of shares. D E Shaw, Hudson Bay Capital Management, and Skylands Capital 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 Value Holdings LP allocated the biggest weight to Cubic Corporation (NYSE:CUB), around 2.17% of its 13F portfolio. Intrepid Capital Management is also relatively very bullish on the stock, earmarking 0.52 percent of its 13F equity portfolio to CUB.

Judging by the fact that Cubic Corporation (NYSE:CUB) has experienced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of money managers that slashed their entire stakes heading into Q4. It’s worth mentioning that James Dinan’s York Capital Management dropped the largest stake of the 750 funds watched by Insider Monkey, valued at an estimated $12.3 million in stock, and Mark Coe’s Intrinsic Edge Capital was right behind this move, as the fund dumped about $11.4 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Cubic Corporation (NYSE:CUB). These stocks are Avanos Medical, Inc. (NYSE:AVNS), Core-Mark Holding Company, Inc. (NASDAQ:CORE), Innovative Industrial Properties, Inc. (NYSE:IIPR), and Revolution Medicines, Inc. (NASDAQ:RVMD). This group of stocks’ market values are similar to CUB’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AVNS 16 83135 8
CORE 19 24155 3
IIPR 14 99011 -2
RVMD 20 223473 20
Average 17.25 107444 7.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $21 million in CUB’s case. Revolution Medicines, Inc. (NASDAQ:RVMD) is the most popular stock in this table. On the other hand Innovative Industrial Properties, Inc. (NYSE:IIPR) is the least popular one with only 14 bullish hedge fund positions. Cubic Corporation (NYSE:CUB) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 and surpassed the market by 17.1 percentage points. Unfortunately CUB wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CUB investors were disappointed as the stock returned -3.1% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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