Is FreightCar America, Inc. (RAIL) A Good Stock To Buy?

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 FreightCar America, Inc. (NASDAQ:RAIL).

Is FreightCar America, Inc. (NASDAQ:RAIL) a good stock to buy now? RAIL investors should be aware of a decrease in activity from the world’s largest hedge funds of late. FreightCar America, Inc. (NASDAQ:RAIL) was in 6 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 16. There were 7 hedge funds in our database with RAIL holdings at the end of June. Our calculations also showed that RAIL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Prem Watsa of Fairfax Financial Holdings

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let’s take a look at the new hedge fund action surrounding FreightCar America, Inc. (NASDAQ:RAIL).

How are hedge funds trading FreightCar America, Inc. (NASDAQ:RAIL)?

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 change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RAIL over the last 21 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

The largest stake in FreightCar America, Inc. (NASDAQ:RAIL) was held by Fairfax Financial Holdings, which reported holding $1 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $0.8 million position. Other investors bullish on the company included Minerva Advisors, Ancora Advisors, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Minerva Advisors allocated the biggest weight to FreightCar America, Inc. (NASDAQ:RAIL), around 0.48% of its 13F portfolio. Fairfax Financial Holdings is also relatively very bullish on the stock, designating 0.06 percent of its 13F equity portfolio to RAIL.

Judging by the fact that FreightCar America, Inc. (NASDAQ:RAIL) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of hedgies that elected to cut their entire stakes heading into Q4. Interestingly, Israel Englander’s Millennium Management cut the largest position of all the hedgies followed by Insider Monkey, totaling about $0 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund cut about $0 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 1 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to FreightCar America, Inc. (NASDAQ:RAIL). These stocks are Ossen Innovation Co Ltd (NASDAQ:OSN), Seanergy Maritime Holdings Corp. (NASDAQ:SHIP), Adial Pharmaceuticals, Inc (NASDAQ:ADIL), Patriot Transportation Holding Inc (NASDAQ:PATI), Four Seasons Education (Cayman) Inc. (NYSE:FEDU), Achieve Life Sciences, Inc. (NASDAQ:ACHV), and Arcadia Biosciences, Inc. (NASDAQ:RKDA). This group of stocks’ market caps resemble RAIL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OSN 1 447 0
SHIP 4 2479 2
ADIL 1 207 0
PATI 2 4293 0
FEDU 2 463 -2
ACHV 1 2379 -2
RKDA 2 840 1
Average 1.9 1587 -0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 1.9 hedge funds with bullish positions and the average amount invested in these stocks was $2 million. That figure was $3 million in RAIL’s case. Seanergy Maritime Holdings Corp. (NASDAQ:SHIP) is the most popular stock in this table. On the other hand Ossen Innovation Co Ltd (NASDAQ:OSN) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks FreightCar America, Inc. (NASDAQ:RAIL) is more popular among hedge funds. Our overall hedge fund sentiment score for RAIL is 65.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 30.7% in 2020 through November 27th but still managed to beat the market by 16.1 percentage points. Hedge funds were also right about betting on RAIL as the stock returned 21.1% since the end of September (through 11/27) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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Disclosure: None. This article was originally published at Insider Monkey.