Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 817 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Regional Management Corp (NYSE:RM).
Is RM a good stock to buy now? Investors who are in the know were selling. The number of bullish hedge fund bets went down by 3 in recent months. Regional Management Corp (NYSE:RM) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 18. Our calculations also showed that RM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 16 hedge funds in our database with RM holdings at the end of June.
Video: 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' 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 66 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.
Tom Brown of Second Curve Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's take a gander at the recent hedge fund action surrounding Regional Management Corp (NYSE:RM).
Do Hedge Funds Think RM Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the second quarter of 2020. On the other hand, there were a total of 11 hedge funds with a bullish position in RM a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Regional Management Corp (NYSE:RM) was held by Basswood Capital, which reported holding $23.7 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $7.2 million position. Other investors bullish on the company included Cannell Capital, Arrowstreet Capital, and Second Curve Capital. In terms of the portfolio weights assigned to each position Second Curve Capital allocated the biggest weight to Regional Management Corp (NYSE:RM), around 7% of its 13F portfolio. Cannell Capital is also relatively very bullish on the stock, dishing out 2.17 percent of its 13F equity portfolio to RM.
Since Regional Management Corp (NYSE:RM) has faced falling interest from the entirety of the hedge funds we track, it's easy to see that there is a sect of hedge funds that elected to cut their full holdings heading into Q4. Interestingly, C. Jonathan Gattman's Cloverdale Capital Management sold off the largest position of all the hedgies watched by Insider Monkey, comprising an estimated $7.1 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dropped its stock, about $0.4 million worth. These moves are important to note, as total hedge fund interest fell by 3 funds heading into Q4.
Let's go over hedge fund activity in other stocks similar to Regional Management Corp (NYSE:RM). These stocks are Gaia, Inc. (NASDAQ:GAIA), CorMedix Inc. (NYSE:CRMD), Saratoga Investment Corp (NYSE:SAR), Nymox Pharmaceutical Corporation (NASDAQ:NYMX), PolyPid Ltd. (NASDAQ:PYPD), The Cato Corporation (NYSE:CATO), and Trecora Resources (NYSE:TREC). This group of stocks' market values are similar to RM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GAIA,15,32144,2 CRMD,5,12462,2 SAR,5,5782,-2 NYMX,1,88,-1 PYPD,2,3226,-3 CATO,12,12305,0 TREC,6,15560,-3 Average,6.6,11652,-0.7 [/table]
As you can see these stocks had an average of 6.6 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $47 million in RM's case. Gaia, Inc. (NASDAQ:GAIA) is the most popular stock in this table. On the other hand Nymox Pharmaceutical Corporation (NASDAQ:NYMX) is the least popular one with only 1 bullish hedge fund positions. Regional Management Corp (NYSE:RM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RM is 66.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Hedge funds were also right about betting on RM as the stock returned 73.3% since the end of Q3 (through 12/8) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
