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Were Hedge Funds Right About Warming Up To Carolina Financial Corporation (CARO)?

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 750 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Carolina Financial Corporation (NASDAQ:CARO), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Carolina Financial Corporation (NASDAQ:CARO) was in 8 hedge funds’ portfolios at the end of June. CARO investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 7 hedge funds in our database with CARO positions at the end of the previous quarter. Our calculations also showed that CARO 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.

Matthew Lindenbaum Basswood Capital

In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources  like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. Let’s take a look at the new hedge fund action regarding Carolina Financial Corporation (NASDAQ:CARO).

How are hedge funds trading Carolina Financial Corporation (NASDAQ:CARO)?

Heading into the third quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from one quarter earlier. By comparison, 7 hedge funds held shares or bullish call options in CARO a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

CARO_nov2019

Among these funds, Mendon Capital Advisors held the most valuable stake in Carolina Financial Corporation (NASDAQ:CARO), which was worth $22.4 million at the end of the second quarter. On the second spot was Renaissance Technologies which amassed $17.6 million worth of shares. Moreover, Millennium Management, Basswood Capital, and Citadel Investment Group were also bullish on Carolina Financial Corporation (NASDAQ:CARO), allocating a large percentage of their portfolios to this stock.

Consequently, key money managers have jumped into Carolina Financial Corporation (NASDAQ:CARO) headfirst. Driehaus Capital, managed by Richard Driehaus, initiated the most outsized position in Carolina Financial Corporation (NASDAQ:CARO). Driehaus Capital had $0.6 million invested in the company at the end of the quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Carolina Financial Corporation (NASDAQ:CARO) but similarly valued. These stocks are Northfield Bancorp Inc (NASDAQ:NFBK), Ambac Financial Group, Inc. (NASDAQ:AMBC), QuinStreet Inc (NASDAQ:QNST), and Construction Partners, Inc. (NASDAQ:ROAD). This group of stocks’ market values resemble CARO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NFBK 2 34954 -3
AMBC 14 112980 -5
QNST 21 218559 -4
ROAD 6 14752 -2
Average 10.75 95311 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $51 million in CARO’s case. QuinStreet Inc (NASDAQ:QNST) is the most popular stock in this table. On the other hand Northfield Bancorp Inc (NASDAQ:NFBK) is the least popular one with only 2 bullish hedge fund positions. Carolina Financial Corporation (NASDAQ:CARO) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CARO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CARO investors were disappointed as the stock returned 1.5% 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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