In this article we will check out the progression of hedge fund sentiment towards Leaf Group Ltd (NYSE:LEAF) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Leaf Group Ltd (NYSE:LEAF) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds’ portfolios at the end of the first quarter of 2020. At the end of this article we will also compare LEAF to other stocks including RigNet Inc (NASDAQ:RNET), Jupai Holdings Limited (NYSE:JP), and Deswell Industries, Inc. (NASDAQ:DSWL) to get a better sense of its popularity.
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.
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 we’re going to take a glance at the new hedge fund action surrounding Leaf Group Ltd (NYSE:LEAF).
Hedge fund activity in Leaf Group Ltd (NYSE:LEAF)
At Q1’s end, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. On the other hand, there were a total of 11 hedge funds with a bullish position in LEAF a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
The largest stake in Leaf Group Ltd (NYSE:LEAF) was held by Park West Asset Management, which reported holding $3.4 million worth of stock at the end of September. It was followed by Osmium Partners with a $1.5 million position. Other investors bullish on the company included Renaissance Technologies, PEAK6 Capital Management, and Osmium Partners. In terms of the portfolio weights assigned to each position Osmium Partners allocated the biggest weight to Leaf Group Ltd (NYSE:LEAF), around 4.76% of its 13F portfolio. Roumell Asset Management is also relatively very bullish on the stock, designating 1.74 percent of its 13F equity portfolio to LEAF.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Millennium Management).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Leaf Group Ltd (NYSE:LEAF) but similarly valued. These stocks are RigNet Inc (NASDAQ:RNET), Jupai Holdings Limited (NYSE:JP), Deswell Industries, Inc. (NASDAQ:DSWL), and Entasis Therapeutics Holdings Inc. (NASDAQ:ETTX). All of these stocks’ market caps are closest to LEAF’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 2 hedge funds with bullish positions and the average amount invested in these stocks was $1 million. That figure was $8 million in LEAF’s case. RigNet Inc (NASDAQ:RNET) is the most popular stock in this table. On the other hand Deswell Industries, Inc. (NASDAQ:DSWL) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Leaf Group Ltd (NYSE:LEAF) 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 13.4% in 2020 through June 22nd but still managed to beat the market by 15.9 percentage points. Hedge funds were also right about betting on LEAF as the stock returned 109.7% so far in Q2 (through June 22nd) 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.
Disclosure: None. This article was originally published at Insider Monkey.