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Were Hedge Funds Right About Flocking Into Rapid7 Inc (RPD) ?

Is Rapid7 Inc (NASDAQ:RPD) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before doing days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Rapid7 Inc (NASDAQ:RPD) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. RPD was in 24 hedge funds’ portfolios at the end of December. There were 17 hedge funds in our database with RPD holdings at the end of the previous quarter. Our calculations also showed that RPD isn’t among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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.

Philip Hempleman Ardsley Partners

We’re going to take a peek at the latest hedge fund action encompassing Rapid7 Inc (NASDAQ:RPD).

What does the smart money think about Rapid7 Inc (NASDAQ:RPD)?

Heading into the first quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 41% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in RPD a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

RPD_apr2019

When looking at the institutional investors followed by Insider Monkey, SQN Investors, managed by Amish Mehta, holds the largest position in Rapid7 Inc (NASDAQ:RPD). SQN Investors has a $48.9 million position in the stock, comprising 5.7% of its 13F portfolio. Sitting at the No. 2 spot is Point72 Asset Management, managed by Steve Cohen, which holds a $45.9 million position; 0.2% of its 13F portfolio is allocated to the stock. Remaining professional money managers that hold long positions consist of Ken Griffin’s Citadel Investment Group, Principal Global Investors’s Columbus Circle Investors and Jim Simons’s Renaissance Technologies.

As industrywide interest jumped, some big names have jumped into Rapid7 Inc (NASDAQ:RPD) headfirst. North Peak Capital, managed by Michael Kahan and Jeremy Kahan, assembled the most valuable position in Rapid7 Inc (NASDAQ:RPD). North Peak Capital had $4.7 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $4.4 million investment in the stock during the quarter. The other funds with brand new RPD positions are Paul Marshall and Ian Wace’s Marshall Wace LLP, Dipak Patel’s Alight Capital, and Philip Hempleman’s Ardsley Partners.

Let’s go over hedge fund activity in other stocks similar to Rapid7 Inc (NASDAQ:RPD). We will take a look at Cars.com Inc. (NYSE:CARS), Kaiser Aluminum Corp. (NASDAQ:KALU), Chesapeake Lodging Trust (NYSE:CHSP), and Cubic Corporation (NYSE:CUB). This group of stocks’ market values match RPD’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CARS 18 306774 -12
KALU 14 122108 -3
CHSP 12 16753 3
CUB 22 97403 4
Average 16.5 135760 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $136 million. That figure was $256 million in RPD’s case. Cubic Corporation (NYSE:CUB) is the most popular stock in this table. On the other hand Chesapeake Lodging Trust (NYSE:CHSP) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Rapid7 Inc (NASDAQ:RPD) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on RPD as the stock returned 63.4% 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.

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

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