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Were Hedge Funds Right About Betting On Unifi, Inc. (UFI)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Unifi, Inc. (NYSE:UFI).

Is Unifi, Inc. (NYSE:UFI) ready to rally soon? Prominent investors are taking a bullish view. The number of long hedge fund positions inched up by 1 recently. Our calculations also showed that UFI 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.

Jeff Ubben VALUEACT CAPITAL

In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources  like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. We’re going to take a look at the key hedge fund action encompassing Unifi, Inc. (NYSE:UFI).

Hedge fund activity in Unifi, Inc. (NYSE:UFI)

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in UFI over the last 16 quarters. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

UFI_oct2019

The largest stake in Unifi, Inc. (NYSE:UFI) was held by Impala Asset Management, which reported holding $28.7 million worth of stock at the end of March. It was followed by ValueAct Capital with a $23.6 million position. Other investors bullish on the company included Royce & Associates, D E Shaw, and Two Sigma Advisors.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Millennium Management, managed by Israel Englander, created the largest position in Unifi, Inc. (NYSE:UFI). Millennium Management had $0.9 million invested in the company at the end of the quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Unifi, Inc. (NYSE:UFI). We will take a look at Avedro, Inc. (NASDAQ:AVDR), Lawson Products, Inc. (NASDAQ:LAWS), Summit Financial Group, Inc. (NASDAQ:SMMF), and Teekay Tankers Ltd. (NYSE:TNK). All of these stocks’ market caps match UFI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AVDR 8 102003 -5
LAWS 5 15089 1
SMMF 2 8578 0
TNK 12 24981 0
Average 6.75 37663 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $69 million in UFI’s case. Teekay Tankers Ltd. (NYSE:TNK) is the most popular stock in this table. On the other hand Summit Financial Group, Inc. (NASDAQ:SMMF) is the least popular one with only 2 bullish hedge fund positions. Unifi, Inc. (NYSE:UFI) 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 UFI as the stock returned 20.6% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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