Hedge Funds Are Dumping GigCapital2, Inc. (GIX)

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is GigCapital2, Inc. (NYSE:GIX) ready to rally soon? Prominent investors are turning less bullish. The number of long hedge fund positions shrunk by 2 recently. Our calculations also showed that GIX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). GIX was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. There were 10 hedge funds in our database with GIX positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Nathaniel August - Mangrove Partners

Nathaniel August of Mangrove Partners

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. Let’s go over the latest hedge fund action encompassing GigCapital2, Inc. (NYSE:GIX).

What have hedge funds been doing with GigCapital2, Inc. (NYSE:GIX)?

Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GIX over the last 17 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in GigCapital2, Inc. (NYSE:GIX) was held by Magnetar Capital, which reported holding $5.2 million worth of stock at the end of September. It was followed by Mangrove Partners with a $4.9 million position. Other investors bullish on the company included Hudson Bay Capital Management, Vertex One Asset Management, and Bulldog Investors. In terms of the portfolio weights assigned to each position Bulldog Investors allocated the biggest weight to GigCapital2, Inc. (NYSE:GIX), around 0.63% of its 13F portfolio. Mangrove Partners is also relatively very bullish on the stock, dishing out 0.6 percent of its 13F equity portfolio to GIX.

Because GigCapital2, Inc. (NYSE:GIX) has faced falling interest from the smart money, logic holds that there is a sect of hedgies who were dropping their positions entirely heading into Q4. Interestingly, Andrew Weiss’s Weiss Asset Management dropped the biggest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $16.2 million in stock. Nathaniel August’s fund, Mangrove Partners, also dumped its stock, about $2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as GigCapital2, Inc. (NYSE:GIX) but similarly valued. These stocks are Hurco Companies, Inc. (NASDAQ:HURC), Citi Trends, Inc. (NASDAQ:CTRN), The Container Store Group, Inc. (NYSE:TCS), and Penns Woods Bancorp, Inc. (NASDAQ:PWOD). All of these stocks’ market caps resemble GIX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HURC 6 36498 -1
CTRN 12 30259 -1
TCS 16 11667 -2
PWOD 1 5741 0
Average 8.75 21041 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $20 million in GIX’s case. The Container Store Group, Inc. (NYSE:TCS) is the most popular stock in this table. On the other hand Penns Woods Bancorp, Inc. (NASDAQ:PWOD) is the least popular one with only 1 bullish hedge fund positions. GigCapital2, Inc. (NYSE:GIX) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GIX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GIX investors were disappointed as the stock returned 1% 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.