How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Lydall, Inc. (NYSE:LDL).
Is LDL a good stock to buy now? Hedge fund interest in Lydall, Inc. (NYSE:LDL) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that LDL 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). At the end of this article we will also compare LDL to other stocks including CRA International, Inc. (NASDAQ:CRAI), Canaan Inc. (NASDAQ:CAN), and Mercantile Bank Corp. (NASDAQ:MBWM) to get a better sense of its popularity.
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 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 S&P 500 ETFs by 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 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.
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. Keeping this in mind let’s go over the recent hedge fund action surrounding Lydall, Inc. (NYSE:LDL).
Do Hedge Funds Think LDL Is A Good Stock To Buy Now?
At the end of September, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LDL over the last 21 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Lydall, Inc. (NYSE:LDL) was held by Juniper Investment Company, which reported holding $20.7 million worth of stock at the end of September. It was followed by Royce & Associates with a $10.9 million position. Other investors bullish on the company included ACK Asset Management, Intrinsic Edge Capital, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Juniper Investment Company allocated the biggest weight to Lydall, Inc. (NYSE:LDL), around 21.9% of its 13F portfolio. ACK Asset Management is also relatively very bullish on the stock, dishing out 4.13 percent of its 13F equity portfolio to LDL.
Because Lydall, Inc. (NYSE:LDL) has witnessed bearish sentiment from the smart money, we can see that there lies a certain “tier” of funds that elected to cut their positions entirely heading into Q4. It’s worth mentioning that Ken Griffin’s Citadel Investment Group dumped the biggest position of the 750 funds watched by Insider Monkey, totaling an estimated $0.8 million in stock, and Greg Eisner’s Engineers Gate Manager was right behind this move, as the fund cut about $0.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Lydall, Inc. (NYSE:LDL) but similarly valued. We will take a look at CRA International, Inc. (NASDAQ:CRAI), Canaan Inc. (NASDAQ:CAN), Mercantile Bank Corp. (NASDAQ:MBWM), Ooma Inc (NYSE:OOMA), Concert Pharmaceuticals Inc (NASDAQ:CNCE), Urovant Sciences Ltd. (NASDAQ:UROV), and Utah Medical Products, Inc. (NASDAQ:UTMD). This group of stocks’ market caps are closest to LDL’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.6 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $48 million in LDL’s case. Concert Pharmaceuticals Inc (NASDAQ:CNCE) is the most popular stock in this table. On the other hand Canaan Inc. (NASDAQ:CAN) is the least popular one with only 5 bullish hedge fund positions. Lydall, Inc. (NYSE:LDL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LDL is 59.3. 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 gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Hedge funds were also right about betting on LDL as the stock returned 79.9% since the end of Q3 (through 12/8) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.