It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Chewy, Inc. (NYSE:CHWY).
Chewy, Inc. (NYSE:CHWY) was in 24 hedge funds’ portfolios at the end of September. CHWY investors should be aware of a decrease in hedge fund interest lately. There were 38 hedge funds in our database with CHWY positions at the end of the previous quarter. Our calculations also showed that CHWY isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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.
Daniel Sundheim of D1 Capital Partners
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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now we’re going to take a look at the fresh hedge fund action regarding Chewy, Inc. (NYSE:CHWY).
What does smart money think about Chewy, Inc. (NYSE:CHWY)?
At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -37% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CHWY over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Lone Pine Capital held the most valuable stake in Chewy, Inc. (NYSE:CHWY), which was worth $124.7 million at the end of the third quarter. On the second spot was Melvin Capital Management which amassed $78.7 million worth of shares. D1 Capital Partners, Anchorage Advisors, and Point72 Asset 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 Stormborn Capital Management allocated the biggest weight to Chewy, Inc. (NYSE:CHWY), around 2.43% of its 13F portfolio. Anchorage Advisors is also relatively very bullish on the stock, designating 2.12 percent of its 13F equity portfolio to CHWY.
Since Chewy, Inc. (NYSE:CHWY) has faced bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few hedge funds who sold off their entire stakes in the third quarter. At the top of the heap, Andreas Halvorsen’s Viking Global dropped the biggest position of the 750 funds monitored by Insider Monkey, valued at close to $51.5 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund cut about $18 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 14 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Chewy, Inc. (NYSE:CHWY) but similarly valued. We will take a look at Trimble Inc. (NASDAQ:TRMB), Devon Energy Corp (NYSE:DVN), Erie Indemnity Company (NASDAQ:ERIE), and Shaw Communications Inc (NYSE:SJR). All of these stocks’ market caps resemble CHWY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TRMB | 25 | 592535 | 9 |
| DVN | 39 | 1275716 | 3 |
| ERIE | 19 | 83890 | 7 |
| SJR | 12 | 270319 | 0 |
| Average | 23.75 | 555615 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $556 million. That figure was $478 million in CHWY’s case. Devon Energy Corp (NYSE:DVN) is the most popular stock in this table. On the other hand Shaw Communications Inc (NYSE:SJR) is the least popular one with only 12 bullish hedge fund positions. Chewy, Inc. (NYSE:CHWY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CHWY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CHWY were disappointed as the stock returned -17.1% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
