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 CEL-SCI Corporation (NYSE:CVM).
CEL-SCI Corporation (NYSE:CVM) was in 5 hedge funds’ portfolios at the end of the third quarter of 2019. CVM has seen an increase in support from the world’s most elite money managers lately. There were 2 hedge funds in our database with CVM holdings at the end of the previous quarter. Our calculations also showed that CVM 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 Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. 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 already gained 20 percent. Now let’s take a look at the recent hedge fund action surrounding CEL-SCI Corporation (NYSE:CVM).
Hedge fund activity in CEL-SCI Corporation (NYSE:CVM)
Heading into the fourth quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 150% from one quarter earlier. By comparison, 1 hedge funds held shares or bullish call options in CVM a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Citadel Investment Group held the most valuable stake in CEL-SCI Corporation (NYSE:CVM), which was worth $1.1 million at the end of the third quarter. On the second spot was D E Shaw which amassed $0.8 million worth of shares. Park West Asset Management, AQR Capital Management, and Sabby Capital 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 Sabby Capital allocated the biggest weight to CEL-SCI Corporation (NYSE:CVM), around 0.09% of its 13F portfolio. Park West Asset Management is also relatively very bullish on the stock, dishing out 0.03 percent of its 13F equity portfolio to CVM.
With a general bullishness amongst the heavyweights, specific money managers have jumped into CEL-SCI Corporation (NYSE:CVM) headfirst. D E Shaw, managed by David E. Shaw, created the most outsized position in CEL-SCI Corporation (NYSE:CVM). D E Shaw had $0.8 million invested in the company at the end of the quarter. Peter S. Park’s Park West Asset Management also made a $0.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Cliff Asness’s AQR Capital Management, Andrew Weiss’s Weiss Asset Management, and Kamran Moghtaderi’s Eversept Partners.
Let’s now review hedge fund activity in other stocks similar to CEL-SCI Corporation (NYSE:CVM). We will take a look at Source Capital, Inc. (NYSE:SOR), Zynex, Inc. (NASDAQ:ZYXI), Gritstone Oncology, Inc. (NASDAQ:GRTS), and Braemar Hotels & Resorts Inc. (NYSE:BHR). This group of stocks’ market values resemble CVM’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SOR | 2 | 8353 | 0 |
| ZYXI | 7 | 6867 | 3 |
| GRTS | 8 | 67140 | 0 |
| BHR | 13 | 55948 | -2 |
| Average | 7.5 | 34577 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $2 million in CVM’s case. Braemar Hotels & Resorts Inc. (NYSE:BHR) is the most popular stock in this table. On the other hand Source Capital, Inc. (NYSE:SOR) is the least popular one with only 2 bullish hedge fund positions. CEL-SCI Corporation (NYSE:CVM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CVM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CVM investors were disappointed as the stock returned -14.8% during the first two months of the fourth quarter and underperformed 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.