Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Matthews International Corp (NASDAQ:MATW).
Is Matthews International Corp (NASDAQ:MATW) a healthy stock for your portfolio? The best stock pickers are getting more bullish. The number of long hedge fund positions improved by 1 lately. Our calculations also showed that MATW isn’t among the 30 most popular stocks among hedge funds (see the video below). MATW was in 13 hedge funds’ portfolios at the end of June. There were 12 hedge funds in our database with MATW positions at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s analyze the latest hedge fund action encompassing Matthews International Corp (NASDAQ:MATW).
What have hedge funds been doing with Matthews International Corp (NASDAQ:MATW)?
At the end of the second quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in MATW a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Matthews International Corp (NASDAQ:MATW) was held by GAMCO Investors, which reported holding $13.2 million worth of stock at the end of March. It was followed by Rutabaga Capital Management with a $10.3 million position. Other investors bullish on the company included Ariel Investments, D E Shaw, and Citadel Investment Group.
With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Renaissance Technologies, initiated the most valuable position in Matthews International Corp (NASDAQ:MATW). Renaissance Technologies had $0.8 million invested in the company at the end of the quarter. Minhua Zhang’s Weld Capital Management also made a $0.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Matthews International Corp (NASDAQ:MATW) but similarly valued. We will take a look at Cortexyme, Inc. (NASDAQ:CRTX), Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW), First Bancorp (NASDAQ:FBNC), and Hess Midstream Partners LP (NYSE:HESM). All of these stocks’ market caps are closest to MATW’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 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $40 million in MATW’s case. Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) is the most popular stock in this table. On the other hand Cortexyme, Inc. (NASDAQ:CRTX) is the least popular one with only 2 bullish hedge fund positions. Matthews International Corp (NASDAQ:MATW) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on MATW, though not to the same extent, as the stock returned 2.2% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.