Canopy Growth Corporation (CGC): Are Hedge Funds Right About This Stock?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Canopy Growth Corporation (NYSE:CGC) and determine whether hedge funds skillfully traded this stock.

Is Canopy Growth Corporation (NYSE:CGC) a healthy stock for your portfolio? Prominent investors were selling. The number of bullish hedge fund bets shrunk by 4 lately. Our calculations also showed that CGC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 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. 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.

William Harnisch of Peconic Partners LLC

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the key hedge fund action regarding Canopy Growth Corporation (NYSE:CGC).

How are hedge funds trading Canopy Growth Corporation (NYSE:CGC)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CGC over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

More specifically, Alkeon Capital Management was the largest shareholder of Canopy Growth Corporation (NYSE:CGC), with a stake worth $28.8 million reported as of the end of September. Trailing Alkeon Capital Management was Coatue Management, which amassed a stake valued at $19 million. Citadel Investment Group, Citadel Investment Group, and OZ Management 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 Coatue Management allocated the biggest weight to Canopy Growth Corporation (NYSE:CGC), around 0.24% of its 13F portfolio. Beech Hill Partners is also relatively very bullish on the stock, earmarking 0.18 percent of its 13F equity portfolio to CGC.

Since Canopy Growth Corporation (NYSE:CGC) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few funds that decided to sell off their full holdings in the first quarter. Intriguingly,  Renaissance Technologies dumped the largest investment of all the hedgies monitored by Insider Monkey, valued at close to $17.4 million in stock, and William Harnisch’s Peconic Partners LLC was right behind this move, as the fund said goodbye to about $4.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 4 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Canopy Growth Corporation (NYSE:CGC). These stocks are Wayfair Inc (NYSE:W), Repligen Corporation (NASDAQ:RGEN), Haemonetics Corporation (NYSE:HAE), and RealPage, Inc. (NASDAQ:RP). This group of stocks’ market valuations resemble CGC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $670 million. That figure was $30 million in CGC’s case. Wayfair Inc (NYSE:W) is the most popular stock in this table. On the other hand Repligen Corporation (NASDAQ:RGEN) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Canopy Growth Corporation (NYSE:CGC) is even less popular than RGEN. Hedge funds dodged a bullet by taking a bearish stance towards CGC. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately CGC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CGC investors were disappointed as the stock returned 12.1% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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