Many analysts point to the fact that, as a group, hedge funds tend to deliver average to below average performance. That is true, but that is also not really a relevant fact to most investors.
To begin with, remember that there is no requirement to be a hedge fund. Anyone can claim to be a hedge fund and self report performance to the indexing agencies. Regulation is required for larger funds but if an investment manager has few investors, regulations may not apply.
That alone explains some of the performance. To some degree, for some participants, starting a hedge fund is like buying a lottery ticket. If they perform well, they hope to attract additional investors. If not, they will quietly fold the fund and seek a new endeavor.
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Understanding that helps to discount the importance of the performance of hedge fund indexes. The truth is hedge funds control trillions of dollars, all of the funds strive to outperform and their investment decisions can impact the prices of stocks, especially small stocks.
We used this insight to develop a screen this week.
Screening Hedge Fund Buys
To find potential buys, we used the screening tool at WhaleWisdom.com. We searched for stocks with a low market cap of less than $100 million with significant buying interest in the previous quarter. That was quantified as new purchases at least doubling the holdings of the funds.
We required that more than 10 funds be holders to avoid stocks with one or two large, concentrated positions. Concentrated positions could be sold quickly if the fund is relatively small and one large share holder redeems their position. Requiring multiple funds to own the stock reduces this risk.
Finally, we looked at the price of the stock and identified stocks trading under $10.
Individual investors find that low priced stocks could be appealing for two reasons. One reason is that the low price means they have little down side risk in dollar terms. The second reason is that low priced stocks are generally the ones that deliver the largest short term gains.
One study looked at how low priced, or cheap, stocks performed relative to more expensive stocks. The study found that cheap stocks delivered more than six times the average return of the more expensive stocks in a typical quarter.
That’s why we limited our search for potential bargains by focusing on stocks priced at less than $10 per share.
Four Stocks Meet Our Strict Requirements
Remember, there is no guarantee any stock will increase in value. Also, it is important to remember when we search for stocks using quantitative measures, our goal is to identify stocks that meet those criteria. The screens we develop could be used as the cornerstone of long term investment strategies but any individual stock in the list could be a winner or loser.
Lightbridge Corporation (Nasdaq: LTBR)
LTBR operates as a nuclear fuel technology company worldwide. It operates through two segments, Technology and Consulting.
LTBR offers all-metal fuel for operating and new build reactors; all-uranium seed and blanket fuel for existing plants and new build reactors; and thorium-based seed and blanket fuel for existing and new build reactors.
The company also provides nuclear power consulting and strategic advisory services to commercial and governmental entities. Its services include integrated strategic advice across a range of areas, including regulatory development, nuclear reactor site selection, procurement and deployment, reactor and fuel technology, international relations, program management, and infrastructure development.
This is a low priced stock that has been in a down trend since it began trading. The fact that the company has survived is an interesting aspect of its operations.
Arcadia Biosciences, Inc. (Nasdaq: RKDA)
RKDA is an agricultural food ingredient company that develops and commercializes health and nutrition ingredient traits worldwide.
The company offers a suite of agricultural productivity traits, including nitrogen use efficiency, water use efficiency and drought tolerance, salinity tolerance, and herbicide tolerance traits.
RKDA also provides nutritional oils comprising gamma linolenic acid safflower oil to manufacturers of dietary and nutritional supplements, medical foods, dog food, and other products under the SONOVA brand; and arachidonic acid safflower oil that is used as an ingredient in infant nutrition products.
This stock shows the same pattern and the fact that it is held by so many hedge funds could indicate a turnaround is at hand.
Atossa Genetics Inc. (Nasdaq: ATOS)
ATOS a clinical-stage pharmaceutical company, focuses on the development and sale of novel therapeutics and delivery methods for the treatment of breast cancer and other breast conditions in the United States.
The company is conducting a Phase 2 clinical study using microcatheters to deliver fulvestrant as a potential treatment of ductal carcinoma in situ and breast cancer; and a pharmaceutical program under development is Endoxifen, an active metabolite of tamoxifen, as well as treatment for breast density and other breast health conditions.
In addition, the company offers ForeCYTE Breast Aspirator and FullCYTE Breast Aspirator, which collects specimens of nipple aspirate fluid (NAF)for cytological testing at a laboratory; and a transport kit to assist with the packaging and transport of NAF samples to a laboratory, as well as manufactures and sells various medical devices primarily consisting of tools to assist breast surgeons.
This stock shows the potential of these stocks. A large rally was followed by a large decline.
A profit taking order could help traders gain if this pattern repeats.
Aytu BioScience, Inc. (Nasdaq: AYTU)
AYTU s a specialty healthcare company, focused on developing and commercializing novel products in the field of urology in the United States.
The company markets Natesto for the treatment of hypogonadism (low testosterone) in men; and ProstaScint for use in newly diagnosed high-risk prostate cancer patients and patients with recurrent prostate cancer. It is also involved in commercializing of the RedoxSYS System for research use in various applications.
In addition, the company is developing MiOXSYS, an in vitro diagnostic semen analysis test that is used in the quantitative measurement of static oxidation reduction potential in human semen.
Sales rose from $0.3 million in 2015 to $3.6 million in the past twelve months, a sign that growth could be near.
Any of these stocks could be a potential winner and all worth further research. If you are uncomfortable doing your own research, there is a TradingTips.com trading service, Triple-Digit Returns, which uses a very specific system for choosing the right stocks to trade.
Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings, mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.
This service provides a recommendation once a week. It could be used for trading or learning how to analyze stocks since each recommendation includes a detailed explanation of the company. To learn more, you can click here.