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Inspired Entertainment, Inc. (INSE): Are Hedge Funds Right About This Stock?

The Insider Monkey team has completed processing the quarterly 13F filings for the September quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Inspired Entertainment, Inc. (NASDAQ:INSE).

Hedge fund interest in Inspired Entertainment, Inc. (NASDAQ:INSE) 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 Luna Innovations Incorporated (NASDAQ:LUNA), Red Lion Hotels Corporation (NYSE:RLH), and 1st Constitution Bancorp (NASDAQ:FCCY) to gather more data points. Our calculations also showed that INSE 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

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. With all of this in mind we’re going to view the new hedge fund action surrounding Inspired Entertainment, Inc. (NASDAQ:INSE).

Hedge fund activity in Inspired Entertainment, Inc. (NASDAQ:INSE)

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in INSE over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in Inspired Entertainment, Inc. (NASDAQ:INSE) was held by HG Vora Capital Management, which reported holding $27 million worth of stock at the end of September. It was followed by 683 Capital Partners with a $5.8 million position. Other investors bullish on the company included Harvey Partners, Renaissance Technologies, and Cove Street Capital. In terms of the portfolio weights assigned to each position HG Vora Capital Management allocated the biggest weight to Inspired Entertainment, Inc. (NASDAQ:INSE), around 2.58% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, designating 0.64 percent of its 13F equity portfolio to INSE.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Inspired Entertainment, Inc. (NASDAQ:INSE) but similarly valued. We will take a look at Luna Innovations Incorporated (NASDAQ:LUNA), Red Lion Hotels Corporation (NYSE:RLH), 1st Constitution Bancorp (NASDAQ:FCCY), and Clearfield, Inc. (NASDAQ:CLFD). All of these stocks’ market caps are similar to INSE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LUNA 7 12148 4
RLH 13 48296 4
FCCY 1 2359 0
CLFD 3 7848 0
Average 6 17663 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 6 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $35 million in INSE’s case. Red Lion Hotels Corporation (NYSE:RLH) is the most popular stock in this table. On the other hand 1st Constitution Bancorp (NASDAQ:FCCY) is the least popular one with only 1 bullish hedge fund positions. Inspired Entertainment, Inc. (NASDAQ:INSE) 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 INSE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); INSE investors were disappointed as the stock returned -2.8% 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.

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