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Is TPI Composites, Inc. (TPIC) Going To Burn These Hedge Funds ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). 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. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like TPI Composites, Inc. (NASDAQ:TPIC).

TPI Composites, Inc. (NASDAQ:TPIC) has seen a decrease in support from the world’s most elite money managers recently. Our calculations also showed that TPIC isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
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.

Philip Hempleman Ardsley Partners

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 review the recent hedge fund action regarding TPI Composites, Inc. (NASDAQ:TPIC).

How have hedgies been trading TPI Composites, Inc. (NASDAQ:TPIC)?

At the end of the second quarter, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TPIC over the last 16 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

TPIC_oct2019

The largest stake in TPI Composites, Inc. (NASDAQ:TPIC) was held by Trigran Investments, which reported holding $48.4 million worth of stock at the end of March. It was followed by Parian Global Management with a $21.8 million position. Other investors bullish on the company included Inherent Group, Arosa Capital Management, and Redwood Capital Management.

Since TPI Composites, Inc. (NASDAQ:TPIC) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few money managers who sold off their full holdings in the second quarter. Interestingly, Richard Driehaus’s Driehaus Capital said goodbye to the biggest investment of the 750 funds followed by Insider Monkey, comprising close to $12.2 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund sold off about $1 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds in the second quarter.

Let’s also examine hedge fund activity in other stocks similar to TPI Composites, Inc. (NASDAQ:TPIC). These stocks are Yiren Digital Ltd. (NYSE:YRD), Chatham Lodging Trust (NYSE:CLDT), FARO Technologies, Inc. (NASDAQ:FARO), and Westlake Chemical Partners LP (NYSE:WLKP). This group of stocks’ market values are closest to TPIC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
YRD 3 6214 0
CLDT 8 53463 1
FARO 7 45598 0
WLKP 3 8610 0
Average 5.25 28471 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.25 hedge funds with bullish positions and the average amount invested in these stocks was $28 million. That figure was $169 million in TPIC’s case. Chatham Lodging Trust (NYSE:CLDT) is the most popular stock in this table. On the other hand Yirendai Ltd. (NYSE:YRD) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks TPI Composites, Inc. (NASDAQ:TPIC) is more popular among hedge funds. 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. Unfortunately TPIC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TPIC were disappointed as the stock returned -24.2% during the third 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 many of these stocks already outperformed the market in Q3.

Disclosure: None. This article was originally published at Insider Monkey.

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