The Latest Moves by Hedge Funds on 3 Conviction Stocks

Hedge fund vehicles have been underperforming the broader market since 2009, but their investors didn’t necessarily expect them to beat benchmarks. In fact, investors poured massive amounts of cash into hedge funds in anticipation of risk-adjusted returns, betting on their ability to control volatility. Even if you are among the individuals who doubt hedge funds’ stock picking abilities and highly-specialized knowledge, you can still monitor their moves as part of a broader stock selection or analysis process. At the end of the day, it pays to see how top money managers feel about certain stocks included in your watchlist. For that reason, this article will discuss three filings submitted with the SEC by several elite hedge funds tracked by Insider Monkey, detailing their latest trades on some of their highest-conviction stocks.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

According to a Schedule 13G, Thomas K. Brown’s Second Curve Capital LLC currently owns 1.45 million shares of Tristate Capital Holdings Inc. (NASDAQ:TSC), accounting for 5.2% of the company’s outstanding common stock. This compares with the 1.35 million-share position disclosed through Second Curve’s 13F filing for the September quarter. The bank holding company owns three wholly-owned subsidiaries, which include Pennsylvania-chartered state bank TriState Capital Bank, investment advisor Chartwell Investment Partners, and potential broker/dealer with the SEC, Chartwell TSC Securities Corp. Tristate Capital Holdings Inc. (NASDAQ:TSC)’s shares have advanced by more than 22% since the beginning of the year, but they still look quite cheap if solely considering the company’s trailing price-to-earnings ratio of 16.10 (the ratio for the S&P 500 Index stands at 22.77). One of Tristate Capital’s subsidiaries is applying to be registered as a broker/dealer with the SEC; hence, the bank holding company could deliver even stronger financial figures should the subsidiary be registered. The company reported total revenue of $76.8 million for the nine-month period that ended September 30, up by $7.2 million from the same period of last year. Similarly, its net income increased to $16.9 million from $10.8 million year-over-year.

The hedge fund sentiment towards the stock did not change significantly during the third quarter, as the number of smart money investors in our database with stakes in the company declined to 11 from 12. Correspondingly, the overall value of those stakes shrank to $35.32 million from $38.96 million. These handful of hedge funds held 10.10% of the bank holding company’s outstanding shares on September 30. Royce & Associates, founded by Chuck Royce, cut its stake in Tristate Capital Holdings Inc. (NASDAQ:TSC) by 21% during the September quarter, to 524,953 shares.

Tom Brown
Tom Brown
Second Curve Capital

Let’s head to the next page of this article, where we reveal Third Avenue’s move in a manufacturer of homes and Hound Partners’ position in a pharmaceutical company.