Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Hedge fund interest in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as EnLink Midstream LLC (NYSE:ENLC), IAMGOLD Corporation (NYSE:IAG), and 8×8, Inc. (NYSE:EGHT) to gather more data points.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let’s take a look at the fresh hedge fund action encompassing Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY).
How have hedgies been trading Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)?
At Q4’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 21 hedge funds with a bullish position in PLAY a year ago. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
The largest stake in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) was held by Hill Path Capital, which reported holding $67.4 million worth of stock at the end of December. It was followed by Balyasny Asset Management with a $20.2 million position. Other investors bullish on the company included Indaba Capital Management, Millennium Management, and Woodson Capital Management.
Since Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has faced bearish sentiment from the smart money, logic holds that there were a few funds that elected to cut their entire stakes by the end of the third quarter. It’s worth mentioning that Gabriel Plotkin’s Melvin Capital Management sold off the biggest stake of the “upper crust” of funds watched by Insider Monkey, comprising close to $66.2 million in call options, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund sold off about $11.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks similar to Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY). These stocks are EnLink Midstream LLC (NYSE:ENLC), IAMGOLD Corporation (NYSE:IAG), 8×8, Inc. (NYSE:EGHT), and ESCO Technologies Inc. (NYSE:ESE). All of these stocks’ market caps are closest to PLAY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ENLC | 15 | 37723 | 2 |
| IAG | 14 | 174230 | 2 |
| EGHT | 17 | 195809 | -1 |
| ESE | 5 | 7438 | -1 |
| Average | 12.75 | 103800 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $231 million in PLAY’s case. 8×8, Inc. (NYSE:EGHT) is the most popular stock in this table. On the other hand ESCO Technologies Inc. (NYSE:ESE) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on PLAY, though not to the same extent, as the stock returned 19.4% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
