We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Morningstar, Inc. (NASDAQ:MORN).
Morningstar, Inc. (NASDAQ:MORN) investors should pay attention to a decrease in hedge fund interest of late. MORN was in 21 hedge funds’ portfolios at the end of December. There were 25 hedge funds in our database with MORN holdings at the end of the previous quarter. Our calculations also showed that MORN 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.
Chuck Royce of Royce & Associates
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. Now we’re going to analyze the fresh hedge fund action surrounding Morningstar, Inc. (NASDAQ:MORN).
What have hedge funds been doing with Morningstar, Inc. (NASDAQ:MORN)?
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MORN over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in Morningstar, Inc. (NASDAQ:MORN) was held by Renaissance Technologies, which reported holding $103.4 million worth of stock at the end of September. It was followed by Royce & Associates with a $77.2 million position. Other investors bullish on the company included Select Equity Group, Arrowstreet Capital, and AQR Capital Management. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Morningstar, Inc. (NASDAQ:MORN), around 0.69% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, earmarking 0.22 percent of its 13F equity portfolio to MORN.
Seeing as Morningstar, Inc. (NASDAQ:MORN) has witnessed declining sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few fund managers that decided to sell off their positions entirely last quarter. At the top of the heap, Minhua Zhang’s Weld Capital Management dumped the largest position of the 750 funds followed by Insider Monkey, totaling an estimated $0.7 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also said goodbye to its stock, about $0.4 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 4 funds last quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Morningstar, Inc. (NASDAQ:MORN) but similarly valued. These stocks are Paylocity Holding Corp (NASDAQ:PCTY), American Campus Communities, Inc. (NYSE:ACC), Oshkosh Corporation (NYSE:OSK), and Brixmor Property Group Inc (NYSE:BRX). All of these stocks’ market caps match MORN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PCTY | 26 | 588280 | -4 |
| ACC | 21 | 342481 | -1 |
| OSK | 28 | 406897 | 2 |
| BRX | 16 | 147201 | -1 |
| Average | 22.75 | 371215 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $371 million. That figure was $286 million in MORN’s case. Oshkosh Corporation (NYSE:OSK) is the most popular stock in this table. On the other hand Brixmor Property Group Inc (NYSE:BRX) is the least popular one with only 16 bullish hedge fund positions. Morningstar, Inc. (NASDAQ:MORN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately MORN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MORN investors were disappointed as the stock returned -28.3% 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 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.
