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Hedge Funds Have Never Been This Bullish On RLI Corp. (RLI)

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about RLI Corp. (NYSE:RLI).

Is RLI Corp. (NYSE:RLI) a buy, sell, or hold? Hedge funds are turning bullish. The number of long hedge fund positions rose by 9 recently. Our calculations also showed that RLI 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). RLI was in 25 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 16 hedge funds in our database with RLI holdings at the end of the previous quarter.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Keeping this in mind we’re going to check out the latest hedge fund action surrounding RLI Corp. (NYSE:RLI).

How are hedge funds trading RLI Corp. (NYSE:RLI)?

Heading into the first quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in RLI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is RLI A Good Stock To Buy?

More specifically, Markel Gayner Asset Management was the largest shareholder of RLI Corp. (NYSE:RLI), with a stake worth $107.8 million reported as of the end of September. Trailing Markel Gayner Asset Management was Polar Capital, which amassed a stake valued at $26.2 million. Royce & Associates, Millennium Management, and Citadel Investment Group 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 Markel Gayner Asset Management allocated the biggest weight to RLI Corp. (NYSE:RLI), around 1.5% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, setting aside 0.48 percent of its 13F equity portfolio to RLI.

As industrywide interest jumped, key hedge funds have jumped into RLI Corp. (NYSE:RLI) headfirst. Driehaus Capital, managed by Richard Driehaus, established the biggest position in RLI Corp. (NYSE:RLI). Driehaus Capital had $2.6 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $2.5 million position during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Benjamin A. Smith’s Laurion Capital Management, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s go over hedge fund activity in other stocks similar to RLI Corp. (NYSE:RLI). We will take a look at Valvoline Inc. (NYSE:VVV), NuVasive, Inc. (NASDAQ:NUVA), Weingarten Realty Investors (NYSE:WRI), and Coherent, Inc. (NASDAQ:COHR). This group of stocks’ market values are similar to RLI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VVV 27 371950 -2
NUVA 26 312278 3
WRI 20 175695 -1
COHR 28 325243 9
Average 25.25 296292 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $230 million in RLI’s case. Coherent, Inc. (NASDAQ:COHR) is the most popular stock in this table. On the other hand Weingarten Realty Investors (NYSE:WRI) is the least popular one with only 20 bullish hedge fund positions. RLI Corp. (NYSE:RLI) is not the least popular stock in this group but hedge fund interest is still below average. 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 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on RLI as the stock returned -11.3% during the same time period and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
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.

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