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Did Hedge Funds Make The Right Call On iRobot Corporation (IRBT) ?

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 iRobot Corporation (NASDAQ:IRBT) and determine whether hedge funds had an edge regarding this stock.

Is iRobot Corporation (NASDAQ:IRBT) a great stock to buy now? The smart money was becoming more confident. The number of long hedge fund bets moved up by 6 lately. Our calculations also showed that IRBT 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). IRBT was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. There were 13 hedge funds in our database with IRBT holdings at the end of the previous quarter.

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.

Prem Watsa of Fairfax Financial Holdings

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar 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. Now let’s take a glance at the recent hedge fund action surrounding iRobot Corporation (NASDAQ:IRBT).

What have hedge funds been doing with iRobot Corporation (NASDAQ:IRBT)?

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 46% from the fourth quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in IRBT 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.

More specifically, Citadel Investment Group was the largest shareholder of iRobot Corporation (NASDAQ:IRBT), with a stake worth $18.3 million reported as of the end of September. Trailing Citadel Investment Group was Two Sigma Advisors, which amassed a stake valued at $8.7 million. D E Shaw, Maverick Capital, and D E Shaw 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 Maverick Capital allocated the biggest weight to iRobot Corporation (NASDAQ:IRBT), around 0.15% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, earmarking 0.15 percent of its 13F equity portfolio to IRBT.

As industrywide interest jumped, specific money managers were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, created the most outsized position in iRobot Corporation (NASDAQ:IRBT). Two Sigma Advisors had $8.7 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also made a $6.3 million investment in the stock during the quarter. The following funds were also among the new IRBT investors: Israel Englander’s Millennium Management, Prem Watsa’s Fairfax Financial Holdings, and Greg Eisner’s Engineers Gate Manager.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as iRobot Corporation (NASDAQ:IRBT) but similarly valued. We will take a look at B&G Foods, Inc. (NYSE:BGS), Alcoa Corporation (NYSE:AA), Crocs, Inc. (NASDAQ:CROX), and Great Western Bancorp Inc (NYSE:GWB). This group of stocks’ market valuations match IRBT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BGS 13 41372 -2
AA 33 213717 3
CROX 25 302666 -11
GWB 10 12427 -7
Average 20.25 142546 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $143 million. That figure was $38 million in IRBT’s case. Alcoa Corporation (NYSE:AA) is the most popular stock in this table. On the other hand Great Western Bancorp Inc (NYSE:GWB) is the least popular one with only 10 bullish hedge fund positions. iRobot Corporation (NASDAQ:IRBT) is not the least popular stock in this group but hedge fund interest is still below 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 and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on IRBT as the stock returned 76.6% since the end of March and outperformed the market by an even larger margin.

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