Is Reynolds American, Inc. (RAI) A Good Stock To Buy?

Reputable billionaire investors such as Nelson Peltz and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Reynolds American, Inc. (NYSE:RAI) investors should pay attention to a decrease in hedge fund sentiment recently. RAI was in 33 hedge funds’ portfolios at the end of the third quarter of 2015. There were 41 hedge funds in our database with RAI positions at the end of the previous quarter. At the end of this article we will also compare RAI to other stocks, including Sanofi SA (ADR) (NYSE:SNY), Philip Morris International Inc. (NYSE:PM), and Unilever N.V. (ADR) (NYSE:UN) to get a better sense of its popularity.

In today’s marketplace there are many gauges market participants employ to grade stocks. A pair of the less known gauges are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the elite investment managers can beat the broader indices by a healthy amount (see the details here).

Now, let’s take a gander at the latest action surrounding Reynolds American, Inc. (NYSE:RAI).

What have hedge funds been doing with Reynolds American, Inc. (NYSE:RAI)?

At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Neil Woodford’s Woodford Investment Management has the biggest position in Reynolds American, Inc. (NYSE:RAI), worth close to $726.4 million, comprising 41.9% of its total 13F portfolio. Sitting at the No. 2 spot is Mason Capital Management, led by Kenneth Mario Garschina, holding a $371.9 million call position; 7.9% of its 13F portfolio is allocated to the company. Other peers with similar optimism comprise David Winters’s Wintergreen Advisers and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Seeing as Reynolds American, Inc. (NYSE:RAI) has witnessed bearish sentiment from hedge fund managers, we can see that there exists a select few money managers that decided to sell off their entire stakes by the end of the third quarter. It’s worth mentioning that Michael A. Price and Amos Meron’s Empyrean Capital Partners sold off the largest stake of the “upper crust” of funds followed by Insider Monkey, comprising an estimated $111.3 million in stock. Carl Tiedemann and Michael Tiedemann’s fund, TIG Advisors, also sold off its stock, about $20.3 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 8 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Reynolds American, Inc. (NYSE:RAI). We will take a look at Sanofi SA (ADR) (NYSE:SNY), Philip Morris International Inc. (NYSE:PM), Unilever N.V. (ADR) (NYSE:UN), and Unilever plc (ADR) (NYSE:UL). This group of stocks’ market values are closest to RAI’s market value.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $1360 million. That figure was $1948 million in RAI’s case. Philip Morris International Inc. (NYSE:PM) is the most popular stock in this table with a total of 30 funds reporting long positions. On the other hand Unilever N.V. (ADR) (NYSE:UN) is the least popular one with only 13 bullish hedge fund positions. Reynolds American, Inc. (NYSE:RAI) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PM might be a better candidate to consider a long position.