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Did Hedge Funds Make The Right Call On Verso Corporation (VRS)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtVerso Corporation (NYSE:VRS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Verso Corporation (NYSE:VRS) shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that VRS 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.

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this under-the-radar lithium 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. Keeping this in mind let’s analyze the fresh hedge fund action encompassing Verso Corporation (NYSE:VRS).

How have hedgies been trading Verso Corporation (NYSE:VRS)?

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in VRS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, SCW Capital Management held the most valuable stake in Verso Corporation (NYSE:VRS), which was worth $25.3 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $22.3 million worth of shares. Skylands Capital, Solas Capital Management, and Redwood 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 SCW Capital Management allocated the biggest weight to Verso Corporation (NYSE:VRS), around 22.6% of its 13F portfolio. Solas Capital Management is also relatively very bullish on the stock, earmarking 8.55 percent of its 13F equity portfolio to VRS.

Because Verso Corporation (NYSE:VRS) has faced bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedge funds that elected to cut their positions entirely in the first quarter. Interestingly, Howard Marks’s Oaktree Capital Management said goodbye to the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $12.2 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund said goodbye to about $2.7 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Verso Corporation (NYSE:VRS) but similarly valued. We will take a look at Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX), United Insurance Holdings Corp. (NASDAQ:UIHC), The Pennant Group, Inc. (NASDAQ:PNTG), and Agilysys, Inc. (NASDAQ:AGYS). This group of stocks’ market valuations are similar to VRS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CPRX 20 79699 1
UIHC 9 4573 -3
PNTG 8 16893 2
AGYS 14 85802 -2
Average 12.75 46742 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $92 million in VRS’s case. Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) is the most popular stock in this table. On the other hand The Pennant Group, Inc. (NASDAQ:PNTG) is the least popular one with only 8 bullish hedge fund positions. Verso Corporation (NYSE:VRS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 but beat the market by 17.1 percentage points. Unfortunately VRS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VRS were disappointed as the stock returned 19.2% during the same time period 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 many of these stocks already outperformed the market so far this year.

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