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. With this in mind let’s see whether Choice Hotels International, Inc. (NYSE:CHH) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Is Choice Hotels International, Inc. (NYSE:CHH) a healthy stock for your portfolio? The smart money is getting less bullish. The number of bullish hedge fund bets dropped by 6 recently. Our calculations also showed that CHH 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).
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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the latest hedge fund action encompassing Choice Hotels International, Inc. (NYSE:CHH).
What does smart money think about Choice Hotels International, Inc. (NYSE:CHH)?
Heading into the first quarter of 2020, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CHH over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
More specifically, Echo Street Capital Management was the largest shareholder of Choice Hotels International, Inc. (NYSE:CHH), with a stake worth $51.7 million reported as of the end of September. Trailing Echo Street Capital Management was GLG Partners, which amassed a stake valued at $36.8 million. Markel Gayner Asset Management, Holocene Advisors, and AQR Capital 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 Echo Street Capital Management allocated the biggest weight to Choice Hotels International, Inc. (NYSE:CHH), around 0.8% of its 13F portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, dishing out 0.29 percent of its 13F equity portfolio to CHH.
Because Choice Hotels International, Inc. (NYSE:CHH) has witnessed a decline in interest from the smart money, it’s easy to see that there lies a certain “tier” of hedgies that decided to sell off their entire stakes by the end of the third quarter. Intriguingly, Renaissance Technologies sold off the largest stake of the “upper crust” of funds followed by Insider Monkey, valued at close to $13.6 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund said goodbye to about $8.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 6 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks similar to Choice Hotels International, Inc. (NYSE:CHH). These stocks are Allison Transmission Holdings Inc (NYSE:ALSN), PG&E Corporation (NYSE:PCG), Synovus Financial Corp. (NYSE:SNV), and Harley-Davidson, Inc. (NYSE:HOG). All of these stocks’ market caps are closest to CHH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ALSN | 33 | 769433 | 2 |
| PCG | 50 | 2755115 | -16 |
| SNV | 35 | 691562 | -4 |
| HOG | 19 | 104510 | -2 |
| Average | 34.25 | 1080155 | -5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $1080 million. That figure was $125 million in CHH’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Harley-Davidson, Inc. (NYSE:HOG) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Choice Hotels International, Inc. (NYSE:CHH) is even less popular than HOG. Hedge funds dodged a bullet by taking a bearish stance towards CHH. 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 CHH wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CHH investors were disappointed as the stock returned -33.4% 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.
