Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.
Sonos, Inc. (NASDAQ:SONO) shareholders have witnessed a decrease in hedge fund sentiment lately. SONO was in 21 hedge funds’ portfolios at the end of the second quarter of 2019. There were 22 hedge funds in our database with SONO positions at the end of the previous quarter. Our calculations also showed that SONO isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the recent hedge fund action encompassing Sonos, Inc. (NASDAQ:SONO).
What does smart money think about Sonos, Inc. (NASDAQ:SONO)?
Heading into the third quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SONO over the last 16 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in Sonos, Inc. (NASDAQ:SONO) was held by Citadel Investment Group, which reported holding $15.5 million worth of stock at the end of March. It was followed by Hawk Ridge Management with a $14.5 million position. Other investors bullish on the company included Portolan Capital Management, Trigran Investments, and Two Sigma Advisors.
Seeing as Sonos, Inc. (NASDAQ:SONO) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of funds who sold off their entire stakes in the second quarter. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP dropped the largest position of the 750 funds watched by Insider Monkey, comprising close to $5.4 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also dumped its stock, about $2.6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds in the second quarter.
Let’s check out hedge fund activity in other stocks similar to Sonos, Inc. (NASDAQ:SONO). These stocks are American Finance Trust, Inc. (NASDAQ:AFIN), Lakeland Financial Corporation (NASDAQ:LKFN), Essential Properties Realty Trust, Inc. (NYSE:EPRT), and Hollysys Automation Technologies Ltd (NASDAQ:HOLI). This group of stocks’ market valuations resemble SONO’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AFIN | 4 | 7811 | -5 |
| LKFN | 11 | 19717 | 0 |
| EPRT | 15 | 111447 | 2 |
| HOLI | 13 | 68693 | -1 |
| Average | 10.75 | 51917 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $84 million in SONO’s case. Essential Properties Realty Trust, Inc. (NYSE:EPRT) is the most popular stock in this table. On the other hand American Finance Trust, Inc. (NASDAQ:AFIN) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Sonos, Inc. (NASDAQ:SONO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on SONO as the stock returned 18.3% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
