Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like SP Plus Corp (NASDAQ:SP).
SP Plus Corp (NASDAQ:SP) investors should pay attention to a decrease in hedge fund sentiment lately. SP was in 11 hedge funds’ portfolios at the end of September. There were 13 hedge funds in our database with SP holdings at the end of the previous quarter. Our calculations also showed that SP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the latest hedge fund action regarding SP Plus Corp (NASDAQ:SP).
What does smart money think about SP Plus Corp (NASDAQ:SP)?
At Q3’s end, a total of 11 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 SP over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, P2 Capital Partners, managed by Claus Moller, holds the most valuable position in SP Plus Corp (NASDAQ:SP). P2 Capital Partners has a $42.3 million position in the stock, comprising 2.9% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, founded by Jim Simons, holding a $20.1 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other peers that are bullish consist of Cliff Asness’s AQR Capital Management, Mark Travis’s Intrepid Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Intrepid Capital Management allocated the biggest weight to SP Plus Corp (NASDAQ:SP), around 3.71% of its 13F portfolio. P2 Capital Partners is also relatively very bullish on the stock, designating 2.86 percent of its 13F equity portfolio to SP.
Seeing as SP Plus Corp (NASDAQ:SP) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of hedge funds that slashed their full holdings heading into Q4. It’s worth mentioning that Leon Lowenstein’s Lionstone Capital Management cut the largest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $0.9 million in stock, and Paul Hondros’s AlphaOne Capital Partners was right behind this move, as the fund dropped about $0.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks similar to SP Plus Corp (NASDAQ:SP). We will take a look at Stoneridge, Inc. (NYSE:SRI), Connecticut Water Service, Inc. (NASDAQ:CTWS), MGP Ingredients Inc (NASDAQ:MGPI), and Trueblue Inc (NYSE:TBI). All of these stocks’ market caps are closest to SP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SRI | 15 | 80512 | 0 |
| CTWS | 7 | 34657 | 2 |
| MGPI | 10 | 47259 | 3 |
| TBI | 14 | 73599 | -1 |
| Average | 11.5 | 59007 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $99 million in SP’s case. Stoneridge, Inc. (NYSE:SRI) is the most popular stock in this table. On the other hand Connecticut Water Service, Inc. (NASDAQ:CTWS) is the least popular one with only 7 bullish hedge fund positions. SP Plus Corp (NASDAQ:SP) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on SP as the stock returned 18.5% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
