FreightCar America, Inc. (RAIL): Are Hedge Funds Right About This Stock?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of FreightCar America, Inc. (NASDAQ:RAIL).

FreightCar America, Inc. (NASDAQ:RAIL) shareholders have witnessed a decrease in hedge fund sentiment lately. RAIL was in 8 hedge funds’ portfolios at the end of March. There were 9 hedge funds in our database with RAIL holdings at the end of the previous quarter. Our calculations also showed that RAIL 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.

In the eyes of most investors, hedge funds are perceived as worthless, outdated investment vehicles of years past. While there are greater than 8000 funds trading today, Our researchers choose to focus on the crème de la crème of this group, approximately 850 funds. It is estimated that this group of investors command the majority of the smart money’s total asset base, and by following their best stock picks, Insider Monkey has unsheathed several investment strategies that have historically outpaced Mr. Market. Insider Monkey’s flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Prem Watsa of Fairfax Financial Holdings

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the new hedge fund action surrounding FreightCar America, Inc. (NASDAQ:RAIL).

How have hedgies been trading FreightCar America, Inc. (NASDAQ:RAIL)?

At the end of the first quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. By comparison, 6 hedge funds held shares or bullish call options in RAIL a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in FreightCar America, Inc. (NASDAQ:RAIL) was held by Fairfax Financial Holdings, which reported holding $0.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $0.3 million position. Other investors bullish on the company included Minerva Advisors, Ancora Advisors, and D E Shaw. In terms of the portfolio weights assigned to each position Minerva Advisors allocated the biggest weight to FreightCar America, Inc. (NASDAQ:RAIL), around 0.23% of its 13F portfolio. Fairfax Financial Holdings is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to RAIL.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Royce & Associates. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified RAIL as a viable investment and initiated a position in the stock.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as FreightCar America, Inc. (NASDAQ:RAIL) but similarly valued. These stocks are Ashford Inc. (NYSE:AINC), Core Molding Technologies, Inc. (NYSE:CMT), Polar Power, Inc. (NASDAQ:POLA), and Cellectar Biosciences, Inc. (NASDAQ:CLRB). This group of stocks’ market valuations are closest to RAIL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AINC 4 590 1
CMT 4 2167 0
POLA 1 53 0
CLRB 3 435 2
Average 3 811 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $1 million in RAIL’s case. Ashford Inc. (NYSE:AINC) is the most popular stock in this table. On the other hand Polar Power, Inc. (NASDAQ:POLA) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks FreightCar America, Inc. (NASDAQ:RAIL) 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 12.2% in 2020 through June 17th but still managed to beat the market by 14.8 percentage points. Hedge funds were also right about betting on RAIL as the stock returned 81.7% so far in Q2 (through June 17th) 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.