Were Hedge Funds Right About Dumping Calavo Growers, Inc. (CVGW)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Calavo Growers, Inc. (NASDAQ:CVGW) and determine whether the smart money was really smart about this stock.

Is Calavo Growers, Inc. (NASDAQ:CVGW) undervalued? The best stock pickers were turning less bullish. The number of long hedge fund positions were cut by 12 recently. Our calculations also showed that CVGW 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.

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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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 stocks that are in our short portfolio.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the new hedge fund action encompassing Calavo Growers, Inc. (NASDAQ:CVGW).

What have hedge funds been doing with Calavo Growers, Inc. (NASDAQ:CVGW)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -52% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CVGW over the last 18 quarters. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Calavo Growers, Inc. (NASDAQ:CVGW), with a stake worth $29.8 million reported as of the end of September. Trailing Renaissance Technologies was Cardinal Capital, which amassed a stake valued at $19.4 million. GLG Partners, Winton Capital Management, and Citadel Investment Group 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 Cardinal Capital allocated the biggest weight to Calavo Growers, Inc. (NASDAQ:CVGW), around 0.96% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.14 percent of its 13F equity portfolio to CVGW.

Seeing as Calavo Growers, Inc. (NASDAQ:CVGW) has faced falling interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of funds who sold off their positions entirely heading into Q4. Interestingly, Ken Griffin’s Citadel Investment Group sold off the biggest stake of the 750 funds followed by Insider Monkey, valued at about $16.6 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dumped its stock, about $12 million worth. These transactions are important to note, as total hedge fund interest was cut by 12 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Calavo Growers, Inc. (NASDAQ:CVGW). These stocks are NextCure, Inc. (NASDAQ:NXTC), Red Rock Resorts, Inc. (NASDAQ:RRR), Atkore International Group Inc. (NYSE:ATKR), and The St. Joe Company (NYSE:JOE). This group of stocks’ market caps are similar to CVGW’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $236 million. That figure was $63 million in CVGW’s case. Red Rock Resorts, Inc. (NASDAQ:RRR) is the most popular stock in this table. On the other hand The St. Joe Company (NYSE:JOE) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Calavo Growers, Inc. (NASDAQ:CVGW) is even less popular than JOE. Hedge funds dodged a bullet by taking a bearish stance towards CVGW. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately CVGW wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CVGW investors were disappointed as the stock returned 9% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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