FreightCar America, Inc. (RAIL) Is Burning These Hedge Funds

Hedge funds are not perfect. They have their bad picks just like everyone else. Facebook, a stock hedge funds have loved dearly, lost nearly 40% of its value at one point in 2018. Although hedge funds are not perfect, their consensus picks do deliver solid returns, however. Our data show the top 20 S&P 500 stocks among hedge funds beat the S&P 500 Index by nearly 10 percentage points so far in 2019. Because hedge funds have a lot of resources and their consensus picks do well, we pay attention to what they think. In this article, we analyze what the elite funds think of FreightCar America, Inc. (NASDAQ:RAIL).

Is FreightCar America, Inc. (NASDAQ:RAIL) worth your attention right now? Prominent investors are betting on the stock. The number of bullish hedge fund bets increased by 1 in recent months. Our calculations also showed that RAIL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the key hedge fund action regarding FreightCar America, Inc. (NASDAQ:RAIL).

Hedge fund activity in FreightCar America, Inc. (NASDAQ:RAIL)

At Q3’s end, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in RAIL over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is RAIL A Good Stock To Buy?

More specifically, Royce & Associates was the largest shareholder of FreightCar America, Inc. (NASDAQ:RAIL), with a stake worth $4 million reported as of the end of September. Trailing Royce & Associates was Fairfax Financial Holdings, which amassed a stake valued at $1.1 million. Minerva Advisors, Ancora Advisors, and Millennium 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 Minerva Advisors allocated the biggest weight to FreightCar America, Inc. (NASDAQ:RAIL), around 0.58% of its 13F portfolio. Venator Capital Management is also relatively very bullish on the stock, designating 0.38 percent of its 13F equity portfolio to RAIL.

Consequently, specific money managers were leading the bulls’ herd. Venator Capital Management, managed by Brandon Osten, created the largest position in FreightCar America, Inc. (NASDAQ:RAIL). Venator Capital Management had $0.4 million invested in the company at the end of the quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as FreightCar America, Inc. (NASDAQ:RAIL) but similarly valued. We will take a look at Home Federal Bancorp Inc of Louisiana (NASDAQ:HFBL), Sonim Technologies, Inc. (NASDAQ:SONM), Virco Mfg. Corporation (NASDAQ:VIRC), and Verona Pharma plc (NASDAQ:VRNA). This group of stocks’ market valuations are similar to RAIL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HFBL 1 2138 0
SONM 3 11246 -5
VIRC 3 5656 0
VRNA 3 12994 -1
Average 2.5 8009 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 2.5 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $9 million in RAIL’s case. Sonim Technologies, Inc. (NASDAQ:SONM) is the most popular stock in this table. On the other hand Home Federal Bancorp Inc of Louisiana (NASDAQ:HFBL) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately RAIL wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on RAIL were disappointed as the stock returned -60% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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