Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
QAD Inc. (NASDAQ:QADA) has seen a decrease in activity from the world’s largest hedge funds of late. QADA was in 16 hedge funds’ portfolios at the end of March. There were 17 hedge funds in our database with QADA positions at the end of the previous quarter. Our calculations also showed that qada isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
We’re going to view the fresh hedge fund action regarding QAD Inc. (NASDAQ:QADA).
What does smart money think about QAD Inc. (NASDAQ:QADA)?
At Q1’s end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in QADA over the last 15 quarters. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management has the biggest position in QAD Inc. (NASDAQ:QADA), worth close to $45.7 million, amounting to 1.4% of its total 13F portfolio. Coming in second is Renaissance Technologies, managed by Jim Simons, which holds a $28.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions consist of George McCabe’s Portolan Capital Management, David Atterbury’s Whetstone Capital Advisors and Chuck Royce’s Royce & Associates.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Shannon River Fund Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified QADA as a viable investment and initiated a position in the stock.
Let’s now take a look at hedge fund activity in other stocks similar to QAD Inc. (NASDAQ:QADA). These stocks are CBTX, Inc. (NASDAQ:CBTX), Intrexon Corp (NASDAQ:XON), Jianpu Technology Inc. (NYSE:JT), and Encore Capital Group, Inc. (NASDAQ:ECPG). This group of stocks’ market valuations match QADA’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 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $125 million in QADA’s case. Encore Capital Group, Inc. (NASDAQ:ECPG) is the most popular stock in this table. On the other hand Jianpu Technology Inc. (NYSE:JT) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks QAD Inc. (NASDAQ:QADA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately QADA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on QADA were disappointed as the stock returned -3.6% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.