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 returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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’ 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 Chuy’s Holdings Inc (NASDAQ:CHUY).
Is Chuy’s Holdings Inc (NASDAQ:CHUY) a splendid investment right now? Money managers are in a bearish mood. The number of long hedge fund positions dropped by 2 lately. Our calculations also showed that chuy isn’t among the 30 most popular stocks among hedge funds. CHUY was in 10 hedge funds’ portfolios at the end of March. There were 12 hedge funds in our database with CHUY positions at the end of the previous quarter.
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’ 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Paul Marshall of Marshall Wace
We’re going to take a look at the new hedge fund action surrounding Chuy’s Holdings Inc (NASDAQ:CHUY).
What have hedge funds been doing with Chuy’s Holdings Inc (NASDAQ:CHUY)?
At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 7 hedge funds with a bullish position in CHUY a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Chuy’s Holdings Inc (NASDAQ:CHUY) was held by SG Capital Management, which reported holding $7.3 million worth of stock at the end of March. It was followed by Empirical Capital Partners with a $7 million position. Other investors bullish on the company included Renaissance Technologies, Marshall Wace LLP, and D E Shaw.
Because Chuy’s Holdings Inc (NASDAQ:CHUY) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of hedge funds who were dropping their positions entirely last quarter. At the top of the heap, Ken Griffin’s Citadel Investment Group dropped the largest investment of all the hedgies watched by Insider Monkey, valued at close to $2.9 million in stock, and Minhua Zhang’s Weld Capital Management was right behind this move, as the fund cut about $0.8 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds last quarter.
Let’s go over hedge fund activity in other stocks similar to Chuy’s Holdings Inc (NASDAQ:CHUY). These stocks are Reading International, Inc. (NASDAQ:RDI), Napco Security Technologies Inc (NASDAQ:NSSC), Farmers National Banc Corp (NASDAQ:FMNB), and Donegal Group Inc (NASDAQ:DGICA). This group of stocks’ market values are similar to CHUY’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| RDI | 6 | 24298 | -2 |
| NSSC | 7 | 11907 | 3 |
| FMNB | 5 | 11220 | -1 |
| DGICA | 3 | 7280 | 1 |
| Average | 5.25 | 13676 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.25 hedge funds with bullish positions and the average amount invested in these stocks was $14 million. That figure was $33 million in CHUY’s case. Napco Security Technologies Inc (NASDAQ:NSSC) is the most popular stock in this table. On the other hand Donegal Group Inc (NASDAQ:DGICA) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Chuy’s Holdings Inc (NASDAQ:CHUY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately CHUY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CHUY were disappointed as the stock returned -0.5% during the same 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
