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Were Hedge Funds Right About Souring On CAI International Inc (CAI)?

You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.

CAI International Inc (NYSE:CAI) has seen a decrease in activity from the world’s largest hedge funds lately. CAI was in 14 hedge funds’ portfolios at the end of the second quarter of 2019. There were 16 hedge funds in our database with CAI positions at the end of the previous quarter. Our calculations also showed that CAI 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’ 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.

CAI_oct2019

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 take a look at the recent hedge fund action encompassing CAI International Inc (NYSE:CAI).

What does smart money think about CAI International Inc (NYSE:CAI)?

At Q2’s end, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CAI over the last 16 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Nathaniel August - Mangrove Partners

More specifically, Park West Asset Management was the largest shareholder of CAI International Inc (NYSE:CAI), with a stake worth $38.6 million reported as of the end of March. Trailing Park West Asset Management was Mangrove Partners, which amassed a stake valued at $27 million. Weiss Asset Management, Royce & Associates, and Fondren Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because CAI International Inc (NYSE:CAI) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few hedge funds that elected to cut their entire stakes by the end of the second quarter. It’s worth mentioning that Jerome L. Simon’s Lonestar Capital Management dumped the biggest position of the “upper crust” of funds watched by Insider Monkey, worth close to $6.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also dropped its stock, about $2.2 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 2 funds by the end of the second quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as CAI International Inc (NYSE:CAI) but similarly valued. We will take a look at PDF Solutions, Inc. (NASDAQ:PDFS), Synthorx, Inc. (NASDAQ:THOR), Replimune Group, Inc. (NASDAQ:REPL), and Sentinel Energy Services Inc. (NASDAQ:STNL). This group of stocks’ market values resemble CAI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PDFS 8 25148 -1
THOR 7 232971 2
REPL 6 74225 1
STNL 15 137785 0
Average 9 117532 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $115 million in CAI’s case. Sentinel Energy Services Inc. (NASDAQ:STNL) is the most popular stock in this table. On the other hand Replimune Group, Inc. (NASDAQ:REPL) is the least popular one with only 6 bullish hedge fund positions. CAI International Inc (NYSE:CAI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CAI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CAI were disappointed as the stock returned -12.3% 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 this year.

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

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