Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we follow the hedge fund activity in the small-cap space.
In this article, we’ll see whether Encore Wire Corporation (NASDAQ:WIRE) represents a good investment based on the hedge fund sentiment towards the stock. Overall, 12 funds from our database held shares of WIRE at the end of September. 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 Constellium NV (NYSE:CSTM), Wave Life Sciences Ltd (NASDAQ:WVE), and Innophos Holdings, Inc. (NASDAQ:IPHS) to gather more data points.
We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.
With all of this in mind, we’re going to take a peek at the latest action regarding Encore Wire Corporation (NASDAQ:WIRE).
How are hedge funds trading Encore Wire Corporation (NASDAQ:WIRE)?
At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, down from 16 funds at the end of the second quarter. By comparison, 13 hedge funds held shares or bullish call options in WIRE heading into this year. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Chuck Royce’s Royce & Associates has the most valuable position in Encore Wire Corporation (NASDAQ:WIRE), worth close to $29 million, comprising 0.2% of its total 13F portfolio. Coming in second is Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, holding a $3.2 million position; the fund has less than 0.1% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions include Cliff Asness’ AQR Capital Management, D E Shaw, one of the biggest hedge funds in the world, and John Overdeck and David Siegel’s Two Sigma Advisors. 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 Encore Wire Corporation (NASDAQ:WIRE) has weathered declining sentiment from the aggregate hedge fund industry, we can see that there is a sect of funds who were dropping their entire stakes heading into Q4. Intriguingly, Israel Englander’s Millennium Management cut the biggest stake of the 700 funds tracked by Insider Monkey, totaling an estimated $2.4 million in stock, and Joel Greenblatt’s Gotham Asset Management was right behind this move, as the fund dropped about $0.6 million worth of shares.
Let’s also examine hedge fund activity in other stocks similar to Encore Wire Corporation (NASDAQ:WIRE). We will take a look at Constellium NV (NYSE:CSTM), Wave Life Sciences Ltd (NASDAQ:WVE), Innophos Holdings, Inc. (NASDAQ:IPHS), and McGrath RentCorp (NASDAQ:MGRC). This group of stocks’ market caps are similar to WIRE’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 17 hedge funds with bullish positions and the average amount invested in these stocks was $171 million, versus $44 million in WIRE’s case. Constellium NV (NYSE:CSTM) is the most popular stock in this table. On the other hand Wave Life Sciences Ltd (NASDAQ:WVE) is the least popular one with only five bullish hedge fund positions. Encore Wire Corporation (NASDAQ:WIRE) 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 CSTM might be a better candidate to consider taking a long position in.