Obscure stocks — publicly traded, unknown, hidden companies with little or even no analyst coverage — may not seem like good investments. Seriously, who wants to invest in a stock no one has ever heard of? Some of the top hedge fund managers in the world, that’s who.
In the first quarter of 2019, elite hedge fund managers, with stellar track records, were buyers of some obscure stocks. We’re talking dogs and cats — not the kinds of stocks Jim Cramer hypes. Few if any investors are tweeting these companies’ merits. It’s even hard to get a quote on some of them — many trade thinly on the “pink sheets” and have five-letter ticker symbols that end with “f” and “y”.
So why would a top investment professional, with a big research budget, mess around buying these arcane, unknown companies? The answer is, of course, that the hedge fund manager doesn’t expect these obscure stocks to be hidden for long. Or at the very least, the manager sees a potentially high reward opportunity emerging, and wants to establish a toehold position.
Obscure stocks, under-followed by analysts, are more likely to be mis-priced.
The hedge fund world is highly competitive. Managers have extensive data on thousands of stocks, making prices highly efficient, and mis-pricing rare. By investigating “under-the-radar” stocks with limited analyst coverage, a hedge fund may gain an edge. Research shows that hedge funds focused on small cap stocks outperform funds investing in large caps.
According to this Barron’s article, big investors’ appetite for small-cap stocks has been increasing. But the average small-cap still has only 4.4 analysts who research it, compared with 23.2 for mega-caps. And 45% of U.S. publicly traded companies have no analyst coverage whatsoever.
A hedge fund establishing a “toehold” position in an obscure stock may be an early heads up that the stock is poised to move higher. If one hedge fund establishes a position, then a second will, then a third discovers the stock. Next analyst coverage increases, and more investors learn about the stock. Soon the word is out…
For this screen I focused on the top 50 hedge funds over the last three years. Using WhaleWisdom.com’s 13F backtester, I searched for new stock 13F positions taken during Q1 by the top funds. I limited the backtest to small-cap stocks — those with market caps under $1 billion. Using data from Interactive Brokers, I screened-out stocks covered by more than four analysts.
Use this list a a starting point for further research.
New positions taken in obscure stocks in Q1 2019 by the top 50 hedge funds. Market cap < $1 billion. ETFs, ADRs and CEFs excluded. Four or less analysts covering the stock.
Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.