Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.
In this article, we are going to take a closer look at Heritage Commerce Corp. (NASDAQ:HTBK), which registered a slight decrease in hedge fund sentiment last quarter. Overall, seven funds tracked by us held shares of HTBK 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 Trevena Inc (NASDAQ:TRVN), Covenant Transportation Group, Inc. (NASDAQ:CVTI), and NQ Mobile Inc (ADR) (NYSE:NQ) 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.
With all of this in mind, we’re going to take a look at the new action regarding Heritage Commerce Corp. (NASDAQ:HTBK).
What have hedge funds been doing with Heritage Commerce Corp. (NASDAQ:HTBK)?
Heading into the fourth quarter of 2016, seven funds tracked by Insider Monkey were long this stock, down by one from the previous quarter. By comparison, 9 hedge funds held shares or bullish call options in HTBK heading into this year. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Elizabeth Park Capital Management, led by Fred Cummings, holds the biggest position in Heritage Commerce Corp. (NASDAQ:HTBK). Elizabeth Park Capital Management has a $4.5 million position in the stock, comprising 2% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, one of the largest hedge funds in the world, holding a $3.2 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism encompass Israel Englander’s Millennium Management, Neil Chriss’s Hutchin Hill Capital 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.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Consector Capital. 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 HTBK as a viable investment and initiated a position in the stock.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Heritage Commerce Corp. (NASDAQ:HTBK) but similarly valued. These stocks are Trevena Inc (NASDAQ:TRVN), Covenant Transportation Group, Inc. (NASDAQ:CVTI), NQ Mobile Inc (ADR) (NYSE:NQ), and Park Electrochemical Corp. (NYSE:PKE). This group of stocks’ market caps match HTBK’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 eight funds with bullish positions and the average amount invested in these stocks was $36 million. That figure was $12 million in HTBK’s case. Trevena Inc (NASDAQ:TRVN) is the most popular stock in this table. On the other hand Park Electrochemical Corp. (NYSE:PKE) is the least popular one with only seven bullish hedge fund positions. Compared to these stocks Heritage Commerce Corp. (NASDAQ:HTBK) registered the same level of popularity as PKE. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.