Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We have processed the filings of the more than 835 world-class investment firms that we track and now have access to the collective wisdom contained in these filings, which are based on their December 31 holdings, data that is available nowhere else. Should you consider Federal Signal Corporation (NYSE:FSS) for your portfolio? We’ll look to this invaluable collective wisdom for the answer.
Federal Signal Corporation (NYSE:FSS) has experienced a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that FSS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 41 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.
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a peek at the key hedge fund action regarding Federal Signal Corporation (NYSE:FSS).
What have hedge funds been doing with Federal Signal Corporation (NYSE:FSS)?
At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FSS over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
More specifically, GAMCO Investors was the largest shareholder of Federal Signal Corporation (NYSE:FSS), with a stake worth $23.9 million reported as of the end of September. Trailing GAMCO Investors was Waratah Capital Advisors, which amassed a stake valued at $13.4 million. Renaissance Technologies, Royce & Associates, and Driehaus Capital 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 Waratah Capital Advisors allocated the biggest weight to Federal Signal Corporation (NYSE:FSS), around 1.42% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, designating 0.85 percent of its 13F equity portfolio to FSS.
Because Federal Signal Corporation (NYSE:FSS) has faced a decline in interest from the smart money, it’s safe to say that there were a few money managers that decided to sell off their entire stakes by the end of the third quarter. It’s worth mentioning that Mark Coe’s Intrinsic Edge Capital sold off the biggest investment of all the hedgies followed by Insider Monkey, valued at about $2.3 million in stock, and David Harding’s Winton Capital Management was right behind this move, as the fund dumped about $2.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks similar to Federal Signal Corporation (NYSE:FSS). We will take a look at Covanta Holding Corporation (NYSE:CVA), Xencor Inc (NASDAQ:XNCR), Redfin Corporation (NASDAQ:RDFN), and Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA). This group of stocks’ market values are closest to FSS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CVA | 19 | 105799 | 5 |
| XNCR | 16 | 107347 | 2 |
| RDFN | 15 | 140093 | -1 |
| MNTA | 33 | 553006 | 15 |
| Average | 20.75 | 226561 | 5.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $227 million. That figure was $91 million in FSS’s case. Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) is the most popular stock in this table. On the other hand Redfin Corporation (NASDAQ:RDFN) is the least popular one with only 15 bullish hedge fund positions. Federal Signal Corporation (NYSE:FSS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately FSS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FSS investors were disappointed as the stock returned -17.3% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
