Were Hedge Funds Right About The RealReal, Inc. (REAL)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 835 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 December 31st. In this article we look at what those investors think of The RealReal, Inc. (NASDAQ:REAL).

The RealReal, Inc. (NASDAQ:REAL) shareholders have witnessed a decrease in hedge fund interest of late. Our calculations also showed that REAL isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 S&P 500 ETFs by 41 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.

Jack Ripsteen Tim Ripsteen Potrero Capital

Jack Ripsteen of Potrero Capital

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s review the latest hedge fund action surrounding The RealReal, Inc. (NASDAQ:REAL).

What does smart money think about The RealReal, Inc. (NASDAQ:REAL)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -38% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in REAL over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

More specifically, Greenspring Associates was the largest shareholder of The RealReal, Inc. (NASDAQ:REAL), with a stake worth $95.1 million reported as of the end of September. Trailing Greenspring Associates was Bayberry Capital Partners, which amassed a stake valued at $12.9 million. Citadel Investment Group, Broad Bay Capital, and Marshall Wace LLP 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 Greenspring Associates allocated the biggest weight to The RealReal, Inc. (NASDAQ:REAL), around 25.09% of its 13F portfolio. Bayberry Capital Partners is also relatively very bullish on the stock, dishing out 5.97 percent of its 13F equity portfolio to REAL.

Seeing as The RealReal, Inc. (NASDAQ:REAL) has faced falling interest from hedge fund managers, it’s safe to say that there is a sect of hedge funds that slashed their full holdings last quarter. At the top of the heap, Alok Agrawal’s Bloom Tree Partners said goodbye to the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $25 million in stock, and Glen Kacher’s Light Street Capital was right behind this move, as the fund said goodbye to about $5.6 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 8 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to The RealReal, Inc. (NASDAQ:REAL). We will take a look at Tronox Holdings plc (NYSE:TROX), Cardlytics, Inc. (NASDAQ:CDLX), Avanos Medical (NYSE:AVNS), and Chesapeake Energy Corporation (NYSE:CHK). All of these stocks’ market caps resemble REAL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TROX 23 138148 3
CDLX 26 438746 7
AVNS 8 151007 -6
CHK 19 42424 2
Average 19 192581 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $154 million in REAL’s case. Cardlytics, Inc. (NASDAQ:CDLX) is the most popular stock in this table. On the other hand Avanos Medical (NYSE:AVNS) is the least popular one with only 8 bullish hedge fund positions. The RealReal, Inc. (NASDAQ:REAL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately REAL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); REAL investors were disappointed as the stock returned -64.9% during the same time period 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 most of these stocks already outperformed the market in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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