Did Hedge Funds Make The Right Call On Callaway Golf Company (ELY) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Callaway Golf Company (NYSE:ELY) and determine whether the smart money was really smart about this stock.

Is Callaway Golf Company (NYSE:ELY) ready to rally soon? Investors who are in the know were in an optimistic mood. The number of bullish hedge fund positions advanced by 3 lately. Our calculations also showed that ELY 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). ELY was in 23 hedge funds’ portfolios at the end of the first quarter of 2020. There were 20 hedge funds in our database with ELY positions at the end of the previous quarter.

Video: 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 S&P 500 ETFs by 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.

Barry Rosenstein of JANA Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s take a glance at the latest hedge fund action encompassing Callaway Golf Company (NYSE:ELY).

What does smart money think about Callaway Golf Company (NYSE:ELY)?

At Q1’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ELY over the last 18 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Among these funds, JANA Partners held the most valuable stake in Callaway Golf Company (NYSE:ELY), which was worth $66.4 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $12.4 million worth of shares. Millennium Management, 13D Management, and Citadel Investment Group 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 JANA Partners allocated the biggest weight to Callaway Golf Company (NYSE:ELY), around 8.46% of its 13F portfolio. Empirical Capital Partners is also relatively very bullish on the stock, designating 5.61 percent of its 13F equity portfolio to ELY.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in Callaway Golf Company (NYSE:ELY). Arrowstreet Capital had $1.1 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also initiated a $1.1 million position during the quarter. The following funds were also among the new ELY investors: Greg Eisner’s Engineers Gate Manager, Prem Watsa’s Fairfax Financial Holdings, and Jinghua Yan’s TwinBeech Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Callaway Golf Company (NYSE:ELY) but similarly valued. These stocks are OceanFirst Financial Corp. (NASDAQ:OCFC), WESCO International, Inc. (NYSE:WCC), US Ecology Inc. (NASDAQ:ECOL), and Sapiens International Corporation N.V. (NASDAQ:SPNS). This group of stocks’ market valuations are similar to ELY’s market valuation.

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As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $81 million. That figure was $120 million in ELY’s case. WESCO International, Inc. (NYSE:WCC) is the most popular stock in this table. On the other hand OceanFirst Financial Corp. (NASDAQ:OCFC) is the least popular one with only 9 bullish hedge fund positions. Callaway Golf Company (NYSE:ELY) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on ELY as the stock returned 71.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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