We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Rick’s Cabaret Int’l, Inc (NASDAQ:RICK).
Rick’s Cabaret Int’l, Inc (NASDAQ:RICK) shareholders have witnessed an increase in hedge fund interest recently. RICK was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. There were 7 hedge funds in our database with RICK holdings at the end of the previous quarter. Our calculations also showed that RICK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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. We’re going to review the recent hedge fund action regarding Rick’s Cabaret Int’l, Inc (NASDAQ:RICK).
What have hedge funds been doing with Rick’s Cabaret Int’l, Inc (NASDAQ:RICK)?
At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the second quarter of 2019. By comparison, 7 hedge funds held shares or bullish call options in RICK a year ago. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Rick’s Cabaret Int’l, Inc (NASDAQ:RICK), with a stake worth $5.6 million reported as of the end of September. Trailing Renaissance Technologies was Marshall Wace, which amassed a stake valued at $2.2 million. Arrowstreet Capital, Winton Capital Management, and Millennium 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 Winton Capital Management allocated the biggest weight to Rick’s Cabaret Int’l, Inc (NASDAQ:RICK), around 0.02% of its 13F portfolio. Marshall Wace is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to RICK.
Now, key money managers were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, initiated the biggest position in Rick’s Cabaret Int’l, Inc (NASDAQ:RICK). Two Sigma Advisors had $0.4 million invested in the company at the end of the quarter. Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital also made a $0 million investment in the stock during the quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Rick’s Cabaret Int’l, Inc (NASDAQ:RICK) but similarly valued. These stocks are LF Capital Acquistion Corp. (NASDAQ:LFAC), NII Holdings, Inc. (NASDAQ:NIHD), SouFun Holdings Limited (NYSE:SFUN), and Bank of Commerce Holdings (NASDAQ:BOCH). This group of stocks’ market valuations resemble RICK’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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 $27 million. That figure was $13 million in RICK’s case. NII Holdings, Inc. (NASDAQ:NIHD) is the most popular stock in this table. On the other hand SouFun Holdings Limited (NYSE:SFUN) is the least popular one with only 5 bullish hedge fund positions. Rick’s Cabaret Int’l, Inc (NASDAQ:RICK) 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 RICK wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RICK investors were disappointed as the stock returned -11% 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.