Hedge Funds Are Betting on These Momentum Stocks

The sustained slowdown of China’s economy triggered a meltdown in most financial markets around the world in the third quarter, including the U.S. equity markets. The Standard and Poor’s 500 Index entered into its first market correction over the past four years or so this August, declining by more than 12% from its all-time high registered on May 21, 2015. The benchmark delivered a negative return of 6.44% for the third quarter, but there was a cluster of stocks that greatly outperformed the broader market in the turbulent three-month period. With that in mind, this article will reveal a list of five strong-performing stocks that received substantial attention from the hedge funds tracked by Insider Monkey. These five stocks generated a return of at least 18% during the September quarter, so let’s examine whether the smart money made the right choice by piling up on those stocks.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 53 percentage points since the end of August 2012 (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

Chubb Corp (NYSE:CB)

-Investors with Long Positions (as of September 30): 48

-Aggregate Value of Investors’ Holdings (as of September 30): $1.43 Billion

Chubb Corp (NYSE:CB) received a lot of attention from the hedge fund industry during the third quarter, as the number of smart money investors from our database with stakes in the company climbed to 48 from 25 quarter-over-quarter. On June 30, Chubb and ACE Limited (NYSE:ACE) announced a merger deal, which is set to create the nation’s second-largest property and casualty insurer by market capitalization. Under the terms of the deal, Chubb shareholders will receive $62.93 per share in cash and 0.6019 shares of ACE common stock. Thus, it appears that the hedge funds that acquired positions in Chubb during the quarter are engaging in merger arbitrage strategies. Meanwhile, the shares of Chubb have advanced 7% since the beginning of the current quarter, as they have been trailing the performance of ACE’s shares. Based on the current price of ACE’s shares, the discrepancy between the current share price of Chubb and the deal price is above $1 per share, which reflects the risks associated with a potential failure of the deal. Clint Carlson’s Carlson Capital acquired a 1.69 million-share stake in Chubb Corp (NYSE:CB) during the latest quarter.

Solera Holdings Inc. (NYSE:SLH)

-Investors with Long Positions (as of September 30): 38

-Aggregate Value of Investors’ Holdings (as of September 30): $982.62 Million

A total of 38 hedge funds tracked by our team were invested in Solera Holdings Inc. (NYSE:SLH) at the end of the third quarter, up from 18 registered in the prior quarter. These hedge fund investors stockpiled 27.10% of the company’s outstanding common stock on September 30. On September 13, the provider of risk and asset management software to the automotive and property marketplace announced that it had agreed to be acquired by an affiliate of Vista Equity Partners Fund V. Hence, it is quite clear why Solera attracted so much attention from the hedge fund industry during the quarter. Going back to the aforementioned deal, each shareholder of Solera is set to receive $55.85 per share in cash for each share owned. Nick Niell’s Arrowgrass Capital Partners added a 3.07 million-share position in Solera Holdings Inc. (NYSE:SLH) to its portfolio during the third quarter.

Cytec Industries Inc. (NYSE:CYT)

-Investors with Long Positions (as of September 30): 34

-Aggregate Value of Investors’ Holdings (as of September 30): $849.83 Million

The number of smart money investors with stakes in Cytec Industries Inc. (NYSE:CYT) increased to 34 from 16 during the June-to-September period. These investment vehicles own slightly more than 16% of Cytec’s outstanding shares as of September 30. On July 29, the global specialty materials and chemicals company announced that it had sealed a merger agreement with Brussels-based Solvay SA, under which the Belgian chemicals company is set to acquire Cytec for approximately $5.5 billion. At the end of November, Cytec’s shareholders approved the merger, as the proposal received support from 99.3% of the votes cast. Hence, each shareholder of Cytec will receive $75.25 per share in cash upon the completion of the merger. D.E. Shaw & Co. L.P., founded by David E. Shaw in 1988, acquired a new stake of 1.20 million shares in Cytec Industries Inc. (NYSE:CYT) during the September quarter.

StanCorp Financial Group Inc. (NYSE:SFG)

-Investors with Long Positions (as of September 30): 23

-Aggregate Value of Investors’ Holdings (as of September 30): $438.05 Million

Is StanCorp Financial Group Inc. (NYSE:SFG) engaged in a merger and acquisition transaction as well? The number of hedge funds observed by Insider Monkey with positons in the company grew to 23 from nine during the September quarter, amassing 9.10% of its shares. Yes, the provider of financial products and services is being acquired by Meiji Yasuda Life Insurance Company for $115.00 per share in cash. StanCorp’s shareholders had the chance to vote against the aforementioned deal at a special shareholder meeting that took place on November 9, but more than 99% of the votes cast were in favor of the transaction. The Japanese insurer is joining the camp of other national peers that have been expanding abroad to overcome the struggling domestic market. Phill Gross and Robert Atchinson’s Adage Capital Management initiated a new position in StanCorp Financial Group Inc. (NYSE:SFG) during the third quarter, which was comprised of 630,100 shares on September 30.

Alphabet Inc. (NASDAQ:GOOGL)

-Investors with Long Positions (as of September 30): 129

-Aggregate Value of Investors’ Holdings (as of September 30): $11.30 Billion

Last but not least, Alphabet Inc. (NASDAQ:GOOGL) received substantial investor interest from the hedge funds monitored by our team in the third quarter. 129 smart money investors had stakes in the tech giant at the end of the third quarter, compared to 115 registered in the previous one. The value of their stakes increased to $11.30 billion from $8.19 billion quarter-over-quarter. Class A shares of Alphabet are up 46% for the year, after advancing 21% since the beginning of the current quarter. Thus, it appears that hedge funds made the right move by piling up more shares of Alphabet during the turbulent third quarter. At the same time, most financial hubs have great expectations on Alphabet’s future potential, assigning the stock price targets of as much as $940. Meanwhile, the stock is trading at a rather rich trailing P/E ratio of 36.13, which however does not reflect the growth potential of this fast-developing company. Andreas Halvorsen’s Viking Global owns 2.53 million Class A shares and 1.12 million Class C shares in Alphabet Inc. (NASDAQ:GOOGL) as of September 30.

Disclosure: None