Hedge Funds Aren’t Crazy About Universal Stainless & Alloy Products (USAP) Anymore

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 of 2018 due to various reasons. Nevertheless, the data show elite investors’ consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETFs by nearly 10 percentage points during the first 11 months of 2019. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Universal Stainless & Alloy Products (NASDAQ:USAP) from the perspective of those elite funds.

Is Universal Stainless & Alloy Products (NASDAQ:USAP) ready to rally soon? Prominent investors are becoming less hopeful. The number of bullish hedge fund positions were trimmed by 2 recently. Our calculations also showed that USAP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). USAP was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. There were 8 hedge funds in our database with USAP 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.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s go over the key hedge fund action regarding Universal Stainless & Alloy Products (NASDAQ:USAP).

What have hedge funds been doing with Universal Stainless & Alloy Products (NASDAQ:USAP)?

Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards USAP over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is USAP A Good Stock To Buy?

Among these funds, Royce & Associates held the most valuable stake in Universal Stainless & Alloy Products (NASDAQ:USAP), which was worth $12.6 million at the end of the third quarter. On the second spot was Minerva Advisors which amassed $6.8 million worth of shares. Forest Hill Capital, Ancora Advisors, and Fondren 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 Universal Stainless & Alloy Products (NASDAQ:USAP), around 3.81% of its 13F portfolio. Forest Hill Capital is also relatively very bullish on the stock, designating 1.53 percent of its 13F equity portfolio to USAP.

Judging by the fact that Universal Stainless & Alloy Products (NASDAQ:USAP) has experienced declining sentiment from hedge fund managers, we can see that there were a few hedge funds that slashed their entire stakes in the third quarter. Interestingly, Israel Englander’s Millennium Management sold off the biggest position of all the hedgies watched by Insider Monkey, valued at about $0.6 million in stock. Renaissance Technologies, also said goodbye to its stock, about $0.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds in the third quarter.

Let’s check out hedge fund activity in other stocks similar to Universal Stainless & Alloy Products (NASDAQ:USAP). These stocks are Armstrong Flooring, Inc. (NYSE:AFI), First Western Financial, Inc. (NASDAQ:MYFW), AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO), and Stewardship Financial Corp (NASDAQ:SSFN). This group of stocks’ market valuations resemble USAP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AFI 13 39918 1
MYFW 3 9054 0
AVEO 5 2750 -2
SSFN 7 13701 2
Average 7 16356 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $26 million in USAP’s case. Armstrong Flooring, Inc. (NYSE:AFI) is the most popular stock in this table. On the other hand First Western Financial, Inc. (NASDAQ:MYFW) is the least popular one with only 3 bullish hedge fund positions. Universal Stainless & Alloy Products (NASDAQ:USAP) 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 USAP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); USAP investors were disappointed as the stock returned -11.2% 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.