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Were Hedge Funds Right About Deserting Insteel Industries Inc (IIIN)?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Insteel Industries Inc (NASDAQ:IIIN) to find out whether it was one of their high conviction long-term ideas.

Insteel Industries Inc (NASDAQ:IIIN) investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that IIIN 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.

AQR CAPITAL MANAGEMENT

Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We’re going to check out the fresh hedge fund action encompassing Insteel Industries Inc (NASDAQ:IIIN).

How have hedgies been trading Insteel Industries Inc (NASDAQ:IIIN)?

At the end of the second quarter, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards IIIN over the last 16 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with IIIN Positions

Of the funds tracked by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the largest position in Insteel Industries Inc (NASDAQ:IIIN). Royce & Associates has a $37.5 million position in the stock, comprising 0.3% of its 13F portfolio. Sitting at the No. 2 spot is D E Shaw, led by D. E. Shaw, holding a $3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions encompass John Overdeck and David Siegel’s Two Sigma Advisors, Cliff Asness’s AQR Capital Management and Jeffrey Moskowitz’s Harvey Partners.

Seeing as Insteel Industries Inc (NASDAQ:IIIN) has faced bearish sentiment from hedge fund managers, logic holds that there lies a certain “tier” of fund managers that slashed their positions entirely heading into Q3. At the top of the heap, Renaissance Technologies dropped the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $2.6 million in stock. Ken Griffin’s fund, Citadel Investment Group, also said goodbye to its stock, about $2.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Insteel Industries Inc (NASDAQ:IIIN). These stocks are Dynex Capital Inc (NYSE:DX), Fluent, Inc. (NASDAQ:FLNT), Trilogy Metals Inc. (NYSE:TMQ), and Gritstone Oncology, Inc. (NASDAQ:GRTS). This group of stocks’ market values resemble IIIN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DX 6 13253 -2
FLNT 9 5665 0
TMQ 14 159645 1
GRTS 8 87517 0
Average 9.25 66520 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $67 million. That figure was $44 million in IIIN’s case. Trilogy Metals Inc. (NYSE:TMQ) is the most popular stock in this table. On the other hand Dynex Capital Inc (NYSE:DX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Insteel Industries Inc (NASDAQ:IIIN) is even less popular than DX. Hedge funds dodged a bullet by taking a bearish stance towards IIIN. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately IIIN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); IIIN investors were disappointed as the stock returned -1.3% 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 so far in 2019.

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

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