Hedge Funds Have Never Been More Bullish On CSW Industrials, Inc. (CSWI)

We are still in an overall bull market and many stocks that smart money investors were piling into 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. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. That’s a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Hedge fund interest in CSW Industrials, Inc. (NASDAQ:CSWI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Addus Homecare Corporation (NASDAQ:ADUS), Talend S.A. (NASDAQ:TLND), and Omega Flex, Inc. (NASDAQ:OFLX) to gather more data points. Our calculations also showed that CSWI 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.

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 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.

Jeffrey Bronchick - Cove Street Capital

Jeffrey Bronchick of Cove Street Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action encompassing CSW Industrials, Inc. (NASDAQ:CSWI).

How have hedgies been trading CSW Industrials, Inc. (NASDAQ:CSWI)?

Heading into the fourth quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in CSWI a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in CSW Industrials, Inc. (NASDAQ:CSWI) was held by Renaissance Technologies, which reported holding $13.3 million worth of stock at the end of September. It was followed by Cove Street Capital with a $9.7 million position. Other investors bullish on the company included Arrowstreet Capital, AQR Capital Management, and Moerus Capital Management. In terms of the portfolio weights assigned to each position Lyon Street Capital allocated the biggest weight to CSW Industrials, Inc. (NASDAQ:CSWI), around 2.32% of its 13F portfolio. Cove Street Capital is also relatively very bullish on the stock, setting aside 1.35 percent of its 13F equity portfolio to CSWI.

Since CSW Industrials, Inc. (NASDAQ:CSWI) has witnessed declining sentiment from the smart money, logic holds that there were a few funds who were dropping their entire stakes heading into Q4. It’s worth mentioning that Paul Tudor Jones’s Tudor Investment Corp said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, worth an estimated $0.4 million in stock, and Bruce Kovner’s Caxton Associates was right behind this move, as the fund sold off about $0.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as CSW Industrials, Inc. (NASDAQ:CSWI) but similarly valued. We will take a look at Addus Homecare Corporation (NASDAQ:ADUS), Talend S.A. (NASDAQ:TLND), Omega Flex, Inc. (NASDAQ:OFLX), and Granite Point Mortgage Trust Inc. (NYSE:GPMT). This group of stocks’ market values resemble CSWI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADUS 23 158689 6
TLND 28 421421 4
OFLX 4 5556 1
GPMT 6 13231 -3
Average 15.25 149724 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $150 million. That figure was $54 million in CSWI’s case. Talend S.A. (NASDAQ:TLND) is the most popular stock in this table. On the other hand Omega Flex, Inc. (NASDAQ:OFLX) is the least popular one with only 4 bullish hedge fund positions. CSW Industrials, Inc. (NASDAQ:CSWI) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on CSWI, though not to the same extent, as the stock returned 7.2% during the first two months of the fourth quarter and outperformed the market as well.

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