Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Century Communities, Inc (NYSE:CCS).
Century Communities, Inc (NYSE:CCS) investors should be aware of an increase in enthusiasm from smart money of late. CCS was in 23 hedge funds’ portfolios at the end of the third quarter of 2019. There were 17 hedge funds in our database with CCS holdings at the end of the previous quarter. Our calculations also showed that CCS 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.
David Keidan of Buckingham Capital
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 surrounding Century Communities, Inc (NYSE:CCS).
How have hedgies been trading Century Communities, Inc (NYSE:CCS)?
Heading into the fourth quarter of 2019, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 35% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in CCS over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Oaktree Capital Management was the largest shareholder of Century Communities, Inc (NYSE:CCS), with a stake worth $55.7 million reported as of the end of September. Trailing Oaktree Capital Management was Basswood Capital, which amassed a stake valued at $29.2 million. Buckingham Capital Management, Driehaus Capital, and Balyasny Asset Management 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 Gratia Capital allocated the biggest weight to Century Communities, Inc (NYSE:CCS), around 7.16% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, setting aside 2.14 percent of its 13F equity portfolio to CCS.
As aggregate interest increased, key hedge funds have been driving this bullishness. Citadel Investment Group, managed by Ken Griffin, created the most valuable call position in Century Communities, Inc (NYSE:CCS). Citadel Investment Group had $2.5 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $1.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Nick Thakore’s Diametric Capital, Matthew Hulsizer’s PEAK6 Capital Management, and Noam Gottesman’s GLG Partners.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Century Communities, Inc (NYSE:CCS) but similarly valued. These stocks are Luminex Corporation (NASDAQ:LMNX), Intrexon Corp (NASDAQ:XON), Palomar Holdings, Inc. (NASDAQ:PLMR), and American Axle & Manufacturing Holdings, Inc. (NYSE:AXL). This group of stocks’ market valuations are closest to CCS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LMNX | 14 | 151826 | -3 |
| XON | 12 | 61604 | 2 |
| PLMR | 13 | 52613 | 5 |
| AXL | 20 | 80795 | 0 |
| Average | 14.75 | 86710 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $159 million in CCS’s case. American Axle & Manufacturing Holdings, Inc. (NYSE:AXL) is the most popular stock in this table. On the other hand Intrexon Corp (NASDAQ:XON) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Century Communities, Inc (NYSE:CCS) is more popular among hedge funds. 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 CCS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CCS were disappointed as the stock returned -7% 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.
