Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cathay General Bancorp (NASDAQ:CATY).
Cathay General Bancorp (NASDAQ:CATY) has seen a decrease in enthusiasm from smart money of late. Our calculations also showed that CATY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Phill Gross of Adage Capital Management
Keeping this in mind let’s take a look at the new hedge fund action encompassing Cathay General Bancorp (NASDAQ:CATY).
Hedge fund activity in Cathay General Bancorp (NASDAQ:CATY)
Heading into the first quarter of 2020, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in CATY over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Phill Gross and Robert Atchinson’s Adage Capital Management has the most valuable position in Cathay General Bancorp (NASDAQ:CATY), worth close to $4.9 million, comprising less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $4.1 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions comprise Ken Griffin’s Citadel Investment Group, John Overdeck and David Siegel’s Two Sigma Advisors and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Sciencast Management allocated the biggest weight to Cathay General Bancorp (NASDAQ:CATY), around 0.08% of its 13F portfolio. AlphaCrest Capital Management is also relatively very bullish on the stock, setting aside 0.06 percent of its 13F equity portfolio to CATY.
Because Cathay General Bancorp (NASDAQ:CATY) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few hedge funds who were dropping their full holdings last quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest investment of the “upper crust” of funds watched by Insider Monkey, totaling about $3.7 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $3.4 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 4 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cathay General Bancorp (NASDAQ:CATY) but similarly valued. We will take a look at KB Home (NYSE:KBH), RLJ Lodging Trust (NYSE:RLJ), Navient Corp (NASDAQ:NAVI), and CVB Financial Corp. (NASDAQ:CVBF). This group of stocks’ market caps match CATY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KBH | 29 | 535490 | 3 |
| RLJ | 17 | 131994 | -4 |
| NAVI | 38 | 513271 | 5 |
| CVBF | 14 | 47079 | 0 |
| Average | 24.5 | 306959 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $307 million. That figure was $23 million in CATY’s case. Navient Corp (NASDAQ:NAVI) is the most popular stock in this table. On the other hand CVB Financial Corp. (NASDAQ:CVBF) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Cathay General Bancorp (NASDAQ:CATY) is even less popular than CVBF. Hedge funds dodged a bullet by taking a bearish stance towards CATY. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately CATY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CATY investors were disappointed as the stock returned -45.3% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
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.
