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Were Hedge Funds Right About Buying Conn’s, Inc. (CONN)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Conn’s, Inc. (NASDAQ:CONN) and determine whether hedge funds skillfully traded this stock.

Conn’s, Inc. (NASDAQ:CONN) has experienced an increase in enthusiasm from smart money lately. CONN was in 18 hedge funds’ portfolios at the end of the first quarter of 2020. There were 16 hedge funds in our database with CONN holdings at the end of the previous quarter. Our calculations also showed that CONN isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

According to most investors, hedge funds are seen as unimportant, old financial vehicles of years past. While there are over 8000 funds in operation at the moment, Our experts hone in on the crème de la crème of this club, around 850 funds. Most estimates calculate that this group of people command most of the hedge fund industry’s total asset base, and by watching their matchless stock picks, Insider Monkey has brought to light various investment strategies that have historically beaten the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to take a gander at the recent hedge fund action regarding Conn’s, Inc. (NASDAQ:CONN).

What have hedge funds been doing with Conn’s, Inc. (NASDAQ:CONN)?

Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CONN over the last 18 quarters. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of Conn’s, Inc. (NASDAQ:CONN), with a stake worth $2.6 million reported as of the end of September. Trailing Royce & Associates was Arrowstreet Capital, which amassed a stake valued at $1.8 million. Millennium Management, Two Sigma Advisors, and Winton Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Algert Coldiron Investors allocated the biggest weight to Conn’s, Inc. (NASDAQ:CONN), around 0.05% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to CONN.

As aggregate interest increased, key money managers were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, established the biggest position in Conn’s, Inc. (NASDAQ:CONN). Two Sigma Advisors had $0.5 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $0.4 million investment in the stock during the quarter. The other funds with brand new CONN positions are Greg Eisner’s Engineers Gate Manager, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now review hedge fund activity in other stocks similar to Conn’s, Inc. (NASDAQ:CONN). These stocks are Information Services Group, Inc. (NASDAQ:III), Bel Fuse, Inc. (NASDAQ:BELFB), Avianca Holdings SA (NYSE:AVH), and Bankwell Financial Group, Inc. (NASDAQ:BWFG). All of these stocks’ market caps match CONN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
III 7 21552 1
BELFB 7 11172 0
AVH 4 1570 1
BWFG 4 15637 -1
Average 5.5 12483 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $9 million in CONN’s case. Information Services Group, Inc. (NASDAQ:III) is the most popular stock in this table. On the other hand Avianca Holdings SA (NYSE:AVH) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Conn’s, Inc. (NASDAQ:CONN) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on CONN as the stock returned 138.8% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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