Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Skyline Champion Corporation (NYSE:SKY).
Is Skyline Champion Corporation (NYSE:SKY) a healthy stock for your portfolio? The smart money is getting more optimistic. The number of long hedge fund positions advanced by 1 lately. Our calculations also showed that SKY isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s go over the new hedge fund action encompassing Skyline Champion Corporation (NYSE:SKY).
What does smart money think about Skyline Champion Corporation (NYSE:SKY)?
Heading into the third quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SKY over the last 16 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Skyline Champion Corporation (NYSE:SKY) was held by MAK Capital One, which reported holding $94.2 million worth of stock at the end of March. It was followed by Marshall Wace LLP with a $23.4 million position. Other investors bullish on the company included Driehaus Capital, Tontine Asset Management, and Newtyn Management.
As industrywide interest jumped, specific money managers were breaking ground themselves. Portolan Capital Management, managed by George McCabe, initiated the biggest position in Skyline Champion Corporation (NYSE:SKY). Portolan Capital Management had $5 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also made a $1.4 million investment in the stock during the quarter. The following funds were also among the new SKY investors: Ken Griffin’s Citadel Investment Group, Guy Shahar’s DSAM Partners, and Dmitry Balyasny’s Balyasny Asset Management.
Let’s now review hedge fund activity in other stocks similar to Skyline Champion Corporation (NYSE:SKY). We will take a look at ShockWave Medical, Inc. (NASDAQ:SWAV), Hailiang Education Group Inc. (NASDAQ:HLG), Group 1 Automotive, Inc. (NYSE:GPI), and McGrath RentCorp (NASDAQ:MGRC). This group of stocks’ market caps are similar to SKY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SWAV | 7 | 111937 | -7 |
| HLG | 2 | 6378 | -1 |
| GPI | 13 | 153111 | 0 |
| MGRC | 18 | 141319 | -4 |
| Average | 10 | 103186 | -3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $103 million. That figure was $258 million in SKY’s case. McGrath RentCorp (NASDAQ:MGRC) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Skyline Champion Corporation (NYSE:SKY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on SKY as the stock returned 9.9% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
