Did Hedge Funds Make The Right Call On The Rubicon Project Inc (RUBI) ?

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 The Rubicon Project Inc (NASDAQ:RUBI) and determine whether hedge funds had an edge regarding this stock.

The Rubicon Project Inc (NASDAQ:RUBI) investors should pay attention to a decrease in enthusiasm from smart money of late. RUBI was in 22 hedge funds’ portfolios at the end of March. There were 24 hedge funds in our database with RUBI positions at the end of the previous quarter. Our calculations also showed that RUBI 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.

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

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. With all of this in mind we’re going to check out the new hedge fund action surrounding The Rubicon Project Inc (NASDAQ:RUBI).

What does smart money think about The Rubicon Project Inc (NASDAQ:RUBI)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in RUBI a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of The Rubicon Project Inc (NASDAQ:RUBI), with a stake worth $8.5 million reported as of the end of September. Trailing Royce & Associates was Portsea Asset Management, which amassed a stake valued at $8.3 million. Driehaus Capital, Arrowstreet Capital, and Marshall Wace LLP 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 Portsea Asset Management allocated the biggest weight to The Rubicon Project Inc (NASDAQ:RUBI), around 7.49% of its 13F portfolio. P.A.W. CAPITAL PARTNERS is also relatively very bullish on the stock, designating 2.99 percent of its 13F equity portfolio to RUBI.

Seeing as The Rubicon Project Inc (NASDAQ:RUBI) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of hedgies who sold off their positions entirely in the first quarter. Intriguingly, Renaissance Technologies sold off the largest stake of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $7 million in stock. Ravee Mehta’s fund, Nishkama Capital, also dumped its stock, about $3.1 million worth. These transactions are interesting, as total hedge fund interest fell by 2 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Rubicon Project Inc (NASDAQ:RUBI) but similarly valued. These stocks are The Chefs Warehouse, Inc (NASDAQ:CHEF), Purple Innovation, Inc. (NASDAQ:PRPL), Tivity Health, Inc. (NASDAQ:TVTY), and Intelligent Systems Corporation (NYSE:INS). All of these stocks’ market caps are similar to RUBI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHEF 11 35478 4
PRPL 14 71224 1
TVTY 13 134787 -5
INS 9 62514 0
Average 11.75 76001 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $50 million in RUBI’s case. Purple Innovation, Inc. (NASDAQ:PRPL) is the most popular stock in this table. On the other hand Intelligent Systems Corporation (NYSE:INS) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks The Rubicon Project Inc (NASDAQ:RUBI) 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 gained 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 RUBI, though not to the same extent, as the stock returned 20.2% in Q2 and outperformed the market as well.

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