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Did Hedge Funds Make The Right Call On Rent-A-Center Inc (RCII) ?

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 Rent-A-Center Inc (NASDAQ:RCII) and determine whether hedge funds skillfully traded this stock.

Rent-A-Center Inc (NASDAQ:RCII) was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. RCII investors should pay attention to a decrease in enthusiasm from smart money of late. There were 25 hedge funds in our database with RCII positions at the end of the previous quarter. Our calculations also showed that RCII 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Steven Cohen

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 gander at the new hedge fund action regarding Rent-A-Center Inc (NASDAQ:RCII).

What have hedge funds been doing with Rent-A-Center Inc (NASDAQ:RCII)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in RCII a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is RCII A Good Stock To Buy?

More specifically, Engaged Capital was the largest shareholder of Rent-A-Center Inc (NASDAQ:RCII), with a stake worth $75.4 million reported as of the end of September. Trailing Engaged Capital was Renaissance Technologies, which amassed a stake valued at $59.2 million. Cloverdale Capital Management, Royce & Associates, 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 Cloverdale Capital Management allocated the biggest weight to Rent-A-Center Inc (NASDAQ:RCII), around 12.58% of its 13F portfolio. Engaged Capital is also relatively very bullish on the stock, dishing out 9.89 percent of its 13F equity portfolio to RCII.

Judging by the fact that Rent-A-Center Inc (NASDAQ:RCII) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few hedge funds that decided to sell off their entire stakes last quarter. Interestingly, Ken Grossman and Glen Schneider’s SG Capital Management sold off the largest stake of all the hedgies tracked by Insider Monkey, valued at close to $16.5 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund dumped about $4.7 million worth. These transactions are interesting, as total hedge fund interest fell by 6 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Rent-A-Center Inc (NASDAQ:RCII). These stocks are Coeur Mining, Inc. (NYSE:CDE), Adverum Biotechnologies, Inc. (NASDAQ:ADVM), American Woodmark Corporation (NASDAQ:AMWD), and Chase Corporation (NYSE:CCF). This group of stocks’ market caps are similar to RCII’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CDE 14 36482 -1
ADVM 25 352608 4
AMWD 11 14493 -6
CCF 10 67591 1
Average 15 117794 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $201 million in RCII’s case. Adverum Biotechnologies, Inc. (NASDAQ:ADVM) is the most popular stock in this table. On the other hand Chase Corporation (NYSE:CCF) is the least popular one with only 10 bullish hedge fund positions. Rent-A-Center Inc (NASDAQ:RCII) 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 RCII as the stock returned 100.3% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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