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.
Extended Stay America Inc (NASDAQ:STAY) investors should be aware of a decrease in enthusiasm from smart money recently. STAY was in 25 hedge funds’ portfolios at the end of September. There were 28 hedge funds in our database with STAY holdings at the end of the previous quarter. Our calculations also showed that STAY 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.
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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ken Griffin of Citadel Investment Group
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s review the recent hedge fund action encompassing Extended Stay America Inc (NASDAQ:STAY).
How are hedge funds trading Extended Stay America Inc (NASDAQ:STAY)?
At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards STAY over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Long Pond Capital held the most valuable stake in Extended Stay America Inc (NASDAQ:STAY), which was worth $129.7 million at the end of the third quarter. On the second spot was Senator Investment Group which amassed $75.8 million worth of shares. Arrowstreet Capital, Cardinal Capital, and Citadel Investment Group 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 Hawk Ridge Management allocated the biggest weight to Extended Stay America Inc (NASDAQ:STAY), around 5.34% of its portfolio. Long Pond Capital is also relatively very bullish on the stock, setting aside 3.38 percent of its 13F equity portfolio to STAY.
Since Extended Stay America Inc (NASDAQ:STAY) has witnessed bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of funds that slashed their full holdings in the third quarter. Intriguingly, Jeffrey Tannenbaum’s Fir Tree cut the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling about $49 million in stock. Jeffrey Furber’s fund, AEW Capital Management, also cut its stock, about $43.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 3 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Extended Stay America Inc (NASDAQ:STAY). We will take a look at Chesapeake Energy Corporation (NYSE:CHK), Acadia Healthcare Company Inc (NASDAQ:ACHC), Texas Capital Bancshares Inc (NASDAQ:TCBI), and Urban Outfitters, Inc. (NASDAQ:URBN). All of these stocks’ market caps resemble STAY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CHK | 17 | 65596 | -1 |
| ACHC | 20 | 574852 | 3 |
| TCBI | 20 | 249477 | 1 |
| URBN | 33 | 292388 | 12 |
| Average | 22.5 | 295578 | 3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $507 million in STAY’s case. Urban Outfitters, Inc. (NASDAQ:URBN) is the most popular stock in this table. On the other hand Chesapeake Energy Corporation (NYSE:CHK) is the least popular one with only 17 bullish hedge fund positions. Extended Stay America Inc (NASDAQ:STAY) 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. 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 STAY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on STAY were disappointed as the stock returned 2.4% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
