Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Chesapeake Utilities Corporation (NYSE:CPK) investors should pay attention to a decrease in hedge fund interest lately. CPK was in 8 hedge funds’ portfolios at the end of the third quarter of 2019. There were 9 hedge funds in our database with CPK holdings at the end of the previous quarter. Our calculations also showed that CPK 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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. Let’s view the key hedge fund action encompassing Chesapeake Utilities Corporation (NYSE:CPK).
How are hedge funds trading Chesapeake Utilities Corporation (NYSE:CPK)?
At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in CPK a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Chesapeake Utilities Corporation (NYSE:CPK), which was worth $24.1 million at the end of the third quarter. On the second spot was Millennium Management which amassed $13 million worth of shares. Citadel Investment Group, AQR Capital Management, and GAMCO Investors 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 Navellier & Associates allocated the biggest weight to Chesapeake Utilities Corporation (NYSE:CPK), around 0.04% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to CPK.
Because Chesapeake Utilities Corporation (NYSE:CPK) has witnessed a decline in interest from hedge fund managers, logic holds that there were a few hedge funds that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, Minhua Zhang’s Weld Capital Management sold off the largest investment of the 750 funds monitored by Insider Monkey, comprising about $0.5 million in stock, and Hoon Kim’s Quantinno Capital was right behind this move, as the fund dumped about $0.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Chesapeake Utilities Corporation (NYSE:CPK). We will take a look at Safety Insurance Group, Inc. (NASDAQ:SAFT), James River Group Holdings Ltd (NASDAQ:JRVR), SunPower Corporation (NASDAQ:SPWR), and Badger Meter, Inc. (NYSE:BMI). This group of stocks’ market values resemble CPK’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SAFT | 9 | 47348 | -1 |
| JRVR | 10 | 52366 | 0 |
| SPWR | 14 | 105625 | 4 |
| BMI | 17 | 142140 | 5 |
| Average | 12.5 | 86870 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $43 million in CPK’s case. Badger Meter, Inc. (NYSE:BMI) is the most popular stock in this table. On the other hand Safety Insurance Group, Inc. (NASDAQ:SAFT) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Chesapeake Utilities Corporation (NYSE:CPK) is even less popular than SAFT. Hedge funds dodged a bullet by taking a bearish stance towards CPK. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CPK wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CPK investors were disappointed as the stock returned -4.4% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
