Reputable billionaire investors such as Nelson Peltz 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.
Compass Diversified Holdings (NYSE:CODI) was in 6 hedge funds’ portfolios at the end of September. CODI investors should pay attention to a decrease in enthusiasm from smart money in recent months. There were 7 hedge funds in our database with CODI holdings at the end of the previous quarter. 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 Maiden Holdings, Ltd. (NASDAQ:MHLD), Zhaopin Ltd (ADR) (NYSE:ZPIN), and Finish Line Inc (NASDAQ:FINL) to gather more data points.
At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.
Keeping this in mind, let’s analyze the recent action surrounding Compass Diversified Holdings (NYSE:CODI).
How are hedge funds trading Compass Diversified Holdings (NYSE:CODI)?
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 14% from the second quarter of 2016. On the other hand, there were a total of 3 hedge funds with a bullish position in CODI at the beginning of this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Renaissance Technologies, one of the biggest hedge funds in the world, has the most valuable position in Compass Diversified Holdings (NYSE:CODI), worth close to $3.8 million, corresponding to less than 0.1% of its total 13F portfolio. The second most bullish fund manager is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $1.8 million position; less than 0.1% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism include Israel Englander’s Millennium Management, and George Hall’s Clinton Group. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.
Seeing as Compass Diversified Holdings (NYSE:CODI) has encountered a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of fund managers who were dropping their full holdings heading into Q4. It’s worth mentioning that Matthew Hulsizer’s PEAK6 Capital Management dropped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, totaling about $0.5 million in stock. Ken Griffin’s fund, Citadel Investment Group, also dumped its stock, about $0.2 million worth of CODI shares.
Let’s check out hedge fund activity in other stocks similar to Compass Diversified Holdings (NYSE:CODI). These stocks are Maiden Holdings, Ltd. (NASDAQ:MHLD), Zhaopin Ltd (ADR) (NYSE:ZPIN), Finish Line Inc (NASDAQ:FINL), and Chesapeake Utilities Corporation (NYSE:CPK). This group of stocks’ market caps resemble CODI’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $8 million in CODI’s case. Finish Line Inc (NASDAQ:FINL) is the most popular stock in this table. On the other hand Zhaopin Ltd (ADR) (NYSE:ZPIN) is the least popular one with only 4 bullish hedge fund positions. Compass Diversified Holdings (NYSE:CODI) 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. In this regard FINL might be a better candidate to consider taking a long position in.