The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards GameStop Corp. (NYSE:GME), and what that likely means for the prospects of the company and its stock.
Is GameStop Corp. (NYSE:GME) the right pick for your portfolio? Money managers are selling. The number of bullish hedge fund positions shrunk by 3 recently. Our calculations also showed that gme isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to analyze the key hedge fund action encompassing GameStop Corp. (NYSE:GME).
What does the smart money think about GameStop Corp. (NYSE:GME)?
Heading into the fourth quarter of 2018, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GME over the last 13 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the biggest position in GameStop Corp. (NYSE:GME). AQR Capital Management has a $23.4 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On AQR Capital Management’s heels is Bridgewater Associates, managed by Ray Dalio, which holds a $16.3 million position; 0.2% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish comprise Dmitry Balyasny’s Balyasny Asset Management, Ross Margolies’s Stelliam Investment Management and Brandon Haley’s Holocene Advisors.
Because GameStop Corp. (NYSE:GME) has experienced bearish sentiment from the smart money, we can see that there was a specific group of money managers that slashed their entire stakes by the end of the third quarter. It’s worth mentioning that Jim Simons’s Renaissance Technologies cut the largest position of the 700 funds followed by Insider Monkey, comprising about $17.9 million in call options, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dropped about $7.3 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 3 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as GameStop Corp. (NYSE:GME) but similarly valued. These stocks are Insmed Incorporated (NASDAQ:INSM), Rush Enterprises, Inc. (NASDAQ:RUSHB), Sonic Corporation (NASDAQ:SONC), and Tri Continental Corporation (NYSE:TY). All of these stocks’ market caps resemble GME’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| INSM | 17 | 310696 | -3 |
| RUSHB | 5 | 36169 | 1 |
| SONC | 20 | 99389 | 7 |
| TY | 2 | 5894 | 0 |
| Average | 11 | 113037 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $113 million. That figure was $119 million in GME’s case. Sonic Corporation (NASDAQ:SONC) is the most popular stock in this table. On the other hand Tri Continental Corporation (NYSE:TY) is the least popular one with only 2 bullish hedge fund positions. GameStop Corp. (NYSE:GME) 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. In this regard SONC might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
