Were Hedge Funds Right About Cashing Out Of L.B. Foster Company (FSTR)?
Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the third quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4 years and analyze what the smart money thinks of L.B. Foster Company (NASDAQ:FSTR) based on that data.
L.B. Foster Company (NASDAQ:FSTR) has seen a decrease in activity from the world's largest hedge funds lately. FSTR was in 11 hedge funds' portfolios at the end of September. There were 15 hedge funds in our database with FSTR positions at the end of the previous quarter. Our calculations also showed that FSTR isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_193003" align="aligncenter" width="450"]
Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We're going to review the new hedge fund action encompassing L.B. Foster Company (NASDAQ:FSTR).
How have hedgies been trading L.B. Foster Company (NASDAQ:FSTR)?
At Q3's end, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FSTR over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Legion Partners Asset Management held the most valuable stake in L.B. Foster Company (NASDAQ:FSTR), which was worth $22.8 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $15.4 million worth of shares. Rutabaga Capital Management, Minerva Advisors, and Royce & Associates 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 Legion Partners Asset Management allocated the biggest weight to L.B. Foster Company (NASDAQ:FSTR), around 5.59% of its 13F portfolio. Rutabaga Capital Management is also relatively very bullish on the stock, setting aside 1.66 percent of its 13F equity portfolio to FSTR.
Judging by the fact that L.B. Foster Company (NASDAQ:FSTR) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of funds who sold off their full holdings by the end of the third quarter. At the top of the heap, Israel Englander's Millennium Management sold off the biggest stake of all the hedgies monitored by Insider Monkey, totaling an estimated $0.6 million in stock, and Noam Gottesman's GLG Partners was right behind this move, as the fund dumped about $0.3 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 4 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks similar to L.B. Foster Company (NASDAQ:FSTR). These stocks are Celsius Holdings, Inc. (NASDAQ:CELH), Century Casinos, Inc. (NASDAQ:CNTY), The Habit Restaurants Inc (NASDAQ:HABT), and CIM Commercial Trust Corporation (NASDAQ:CMCT). All of these stocks' market caps are similar to FSTR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CELH,5,820,3 CNTY,13,51313,3 HABT,13,38775,1 CMCT,2,579,1 Average,8.25,22872,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $23 million. That figure was $53 million in FSTR's case. Century Casinos, Inc. (NASDAQ:CNTY) is the most popular stock in this table. On the other hand CIM Commercial Trust Corporation (NASDAQ:CMCT) is the least popular one with only 2 bullish hedge fund positions. L.B. Foster Company (NASDAQ:FSTR) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately FSTR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FSTR were disappointed as the stock returned -12.6% during the fourth quarter (through the end of November) 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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