Is Jernigan Capital Inc (JCAP) Going to Burn These Hedge Funds?

Does Jernigan Capital Inc (NYSE:JCAP) represent a good buying opportunity at the moment? Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Jernigan Capital Inc (NYSE:JCAP) was in 13 hedge funds’ portfolios at the end of September. JCAP shareholders have witnessed a decrease in enthusiasm from smart money recently. There were 15 hedge funds in our database with JCAP positions at the end of the previous quarter. Our calculations also showed that JCAP 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.

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the key hedge fund action surrounding Jernigan Capital Inc (NYSE:JCAP).

Hedge fund activity in Jernigan Capital Inc (NYSE:JCAP)

At Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in JCAP a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is JCAP A Good Stock To Buy?

The largest stake in Jernigan Capital Inc (NYSE:JCAP) was held by Shoals Capital Management, which reported holding $15.4 million worth of stock at the end of September. It was followed by Forward Management with a $10.3 million position. Other investors bullish on the company included Highland Capital Management, Renaissance Technologies, and Winton Capital Management. In terms of the portfolio weights assigned to each position Shoals Capital Management allocated the biggest weight to Jernigan Capital Inc (NYSE:JCAP), around 21.18% of its 13F portfolio. Forward Management is also relatively very bullish on the stock, designating 1.57 percent of its 13F equity portfolio to JCAP.

Since Jernigan Capital Inc (NYSE:JCAP) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of funds who were dropping their entire stakes by the end of the third quarter. Interestingly, Israel Englander’s Millennium Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling an estimated $3.5 million in stock, and Thomas Bailard’s Bailard Inc was right behind this move, as the fund dropped about $0.3 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 2 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Jernigan Capital Inc (NYSE:JCAP) but similarly valued. We will take a look at Luxfer Holdings PLC (NYSE:LXFR), CNX Resources Corporation (NYSE:CEIX), Precision BioSciences, Inc. (NASDAQ:DTIL), and Resolute Forest Products Inc (NYSE:RFP). This group of stocks’ market valuations match JCAP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LXFR 11 67175 2
CEIX 20 60398 4
DTIL 13 39919 4
RFP 16 186530 -1
Average 15 88506 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $43 million in JCAP’s case. CNX Resources Corporation (NYSE:CEIX) is the most popular stock in this table. On the other hand Luxfer Holdings PLC (NYSE:LXFR) is the least popular one with only 11 bullish hedge fund positions. Jernigan Capital Inc (NYSE:JCAP) 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 JCAP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); JCAP investors were disappointed as the stock returned -9.2% 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.