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Were Hedge Funds Right About Pulling The Plug On Cathay General Bancorp (CATY)?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Cathay General Bancorp (NASDAQ:CATY).

Is Cathay General Bancorp (NASDAQ:CATY) worth your attention right now? Investors who are in the know are getting less optimistic. The number of bullish hedge fund bets went down by 2 recently. Our calculations also showed that CATY isn’t among the 30 most popular stocks among hedge funds (see the video below). CATY was in 12 hedge funds’ portfolios at the end of the second quarter of 2019. There were 14 hedge funds in our database with CATY holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross, Adage Capital Management

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the fresh hedge fund action regarding Cathay General Bancorp (NASDAQ:CATY).

Hedge fund activity in Cathay General Bancorp (NASDAQ:CATY)

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CATY over the last 16 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

CATY_oct2019

More specifically, GLG Partners was the largest shareholder of Cathay General Bancorp (NASDAQ:CATY), with a stake worth $7.4 million reported as of the end of March. Trailing GLG Partners was Adage Capital Management, which amassed a stake valued at $5 million. Millennium Management, Arrowstreet Capital, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Cathay General Bancorp (NASDAQ:CATY) has experienced declining sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of fund managers who sold off their entire stakes by the end of the second quarter. It’s worth mentioning that Peter Algert and Kevin Coldiron’s Algert Coldiron Investors dropped the biggest investment of all the hedgies followed by Insider Monkey, comprising about $1.8 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dropped its stock, about $1.2 million worth. These transactions are important to note, as total hedge fund interest was cut by 2 funds by the end of the second quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cathay General Bancorp (NASDAQ:CATY) but similarly valued. We will take a look at Magnolia Oil & Gas Corporation (NYSE:MGY), Dorman Products Inc. (NASDAQ:DORM), Reata Pharmaceuticals, Inc. (NASDAQ:RETA), and American Eagle Outfitters Inc. (NYSE:AEO). This group of stocks’ market caps are closest to CATY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MGY 19 172385 -13
DORM 14 65216 -1
RETA 15 287383 -3
AEO 21 348672 -4
Average 17.25 218414 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $38 million in CATY’s case. American Eagle Outfitters Inc. (NYSE:AEO) is the most popular stock in this table. On the other hand Dorman Products Inc. (NASDAQ:DORM) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Cathay General Bancorp (NASDAQ:CATY) is even less popular than DORM. Hedge funds dodged a bullet by taking a bearish stance towards CATY. 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 CATY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CATY investors were disappointed as the stock returned -2.4% 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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