Is Rapid7 Inc (RPD) Going to Burn These Hedge Funds?

Abigail Fisher

Updated Tue, Dec 18, 2018, 8:52 PM

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Rapid7 Inc (NASDAQ:RPD).

Rapid7 Inc (NASDAQ:RPD) was in 17 hedge funds' portfolios at the end of September. RPD has experienced an increase in hedge fund sentiment recently. There were 14 hedge funds in our database with RPD positions at the end of the previous quarter. Our calculations also showed that RPD isn't among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

Let's go over the key hedge fund action encompassing Rapid7 Inc (NASDAQ:RPD).

What have hedge funds been doing with Rapid7 Inc (NASDAQ:RPD)?

Heading into the fourth quarter of 2018, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards RPD over the last 13 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey's hedge fund database, Renaissance Technologies, managed by Jim Simons, holds the most valuable position in Rapid7 Inc (NASDAQ:RPD). Renaissance Technologies has a $40.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by Point72 Asset Management, led by Steve Cohen, holding a $38.8 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish comprise Bruce Garelick's Garelick Capital Partners, Principal Global Investors's Columbus Circle Investors and Ken Griffin's Citadel Investment Group.

As aggregate interest increased, some big names were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, established the most valuable position in Rapid7 Inc (NASDAQ:RPD). Point72 Asset Management had $38.8 million invested in the company at the end of the quarter. Amish Mehta's SQN Investors also initiated a $16 million position during the quarter. The other funds with brand new RPD positions are Anand Parekh's Alyeska Investment Group, Matthew Hulsizer's PEAK6 Capital Management, and Dmitry Balyasny's Balyasny Asset Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Rapid7 Inc (NASDAQ:RPD) but similarly valued. We will take a look at SPS Commerce, Inc. (NASDAQ:SPSC), IAMGOLD Corporation (NYSE:IAG), Nevro Corp (NYSE:NVRO), and Sangamo Therapeutics, Inc. (NASDAQ:SGMO). This group of stocks' market caps are closest to RPD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPSC,19,160967,-1 IAG,12,107461,-3 NVRO,24,381162,2 SGMO,26,143431,-3 Average,20.25,198255,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $222 million in RPD's case. Sangamo Therapeutics, Inc. (NASDAQ:SGMO) is the most popular stock in this table. On the other hand IAMGOLD Corporation (NYSE:IAG) is the least popular one with only 12 bullish hedge fund positions. Rapid7 Inc (NASDAQ:RPD) 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. In this regard SGMO might be a better candidate to consider a long position.

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

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