Did Hedge Funds Make The Right Call On QuinStreet Inc (QNST) ?

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 QuinStreet Inc (NASDAQ:QNST) and determine whether hedge funds had an edge regarding this stock.

QuinStreet Inc (NASDAQ:QNST) has experienced an increase in hedge fund interest of late. Our calculations also showed that QNST 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.

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.


Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. 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 if you have any good ideas send us an email. Now we’re going to take a glance at the key hedge fund action encompassing QuinStreet Inc (NASDAQ:QNST).

How have hedgies been trading QuinStreet Inc (NASDAQ:QNST)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from the previous quarter. The graph below displays the number of hedge funds with bullish position in QNST over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Private Capital Management was the largest shareholder of QuinStreet Inc (NASDAQ:QNST), with a stake worth $26.7 million reported as of the end of September. Trailing Private Capital Management was Rubric Capital Management, which amassed a stake valued at $22.7 million. Red Cedar Management, Citadel Investment Group, and Portolan Capital Management 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 Red Cedar Management allocated the biggest weight to QuinStreet Inc (NASDAQ:QNST), around 13.35% of its 13F portfolio. Private Capital Management is also relatively very bullish on the stock, designating 8.37 percent of its 13F equity portfolio to QNST.

Now, key money managers have jumped into QuinStreet Inc (NASDAQ:QNST) headfirst. Citadel Investment Group, managed by Ken Griffin, created the largest position in QuinStreet Inc (NASDAQ:QNST). Citadel Investment Group had $7.9 million invested in the company at the end of the quarter. Travis Cocke’s Voss Capital also initiated a $2.1 million position during the quarter. The other funds with brand new QNST positions are Israel Englander’s Millennium Management, Greg Eisner’s Engineers Gate Manager, and Peter A. Wright’s P.A.W. CAPITAL PARTNERS.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as QuinStreet Inc (NASDAQ:QNST) but similarly valued. These stocks are G1 Therapeutics, Inc. (NASDAQ:GTHX), Energy Recovery, Inc. (NASDAQ:ERII), BioSpecifics Technologies Corp. (NASDAQ:BSTC), and First Community Bancshares Inc (NASDAQ:FCBC). This group of stocks’ market valuations match QNST’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GTHX 13 25511 2
ERII 11 45757 4
BSTC 9 52752 -2
FCBC 5 8715 -2
Average 9.5 33184 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 $33 million. That figure was $93 million in QNST’s case. G1 Therapeutics, Inc. (NASDAQ:GTHX) is the most popular stock in this table. On the other hand First Community Bancshares Inc (NASDAQ:FCBC) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks QuinStreet Inc (NASDAQ:QNST) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on QNST as the stock returned 29.9% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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