We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Houghton Mifflin Harcourt Co (NASDAQ:HMHC) and determine whether hedge funds skillfully traded this stock.
Hedge fund interest in Houghton Mifflin Harcourt Co (NASDAQ:HMHC) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that HMHC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare HMHC to other stocks including ACNB Corporation (NASDAQ:ACNB), Universal Technical Institute, Inc. (NYSE:UTI), and GasLog Ltd (NYSE:GLOG) to get a better sense of its popularity.
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are dozens of gauges investors use to appraise their stock investments. A pair of the less known gauges are hedge fund and insider trading moves. Our experts have shown that, historically, those who follow the best picks of the best investment managers can outperform the market by a very impressive margin (see the details here).
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a glance at the new hedge fund action encompassing Houghton Mifflin Harcourt Co (NASDAQ:HMHC).
Hedge fund activity in Houghton Mifflin Harcourt Co (NASDAQ:HMHC)
At the end of the second quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in HMHC a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, Anchorage Advisors held the most valuable stake in Houghton Mifflin Harcourt Co (NASDAQ:HMHC), which was worth $35.2 million at the end of the third quarter. On the second spot was Water Street Capital which amassed $10.9 million worth of shares. Freshford Capital Management, Rutabaga Capital Management, and Millennium 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 Gratia Capital allocated the biggest weight to Houghton Mifflin Harcourt Co (NASDAQ:HMHC), around 4.82% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, setting aside 1.78 percent of its 13F equity portfolio to HMHC.
Judging by the fact that Houghton Mifflin Harcourt Co (NASDAQ:HMHC) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of fund managers that decided to sell off their entire stakes heading into Q3. It’s worth mentioning that Ravee Mehta’s Nishkama Capital said goodbye to the biggest investment of all the hedgies followed by Insider Monkey, totaling an estimated $2.2 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also said goodbye to its stock, about $0.4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks similar to Houghton Mifflin Harcourt Co (NASDAQ:HMHC). These stocks are ACNB Corporation (NASDAQ:ACNB), Universal Technical Institute, Inc. (NYSE:UTI), GasLog Ltd (NYSE:GLOG), Mallinckrodt Public Limited Company (NYSE:MNK), Taiwan Liposome Company, Ltd. (NASDAQ:TLC), Territorial Bancorp Inc (NASDAQ:TBNK), and GigCapital2, Inc. (NASDAQ:GIX). This group of stocks’ market values resemble HMHC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ACNB | 1 | 1854 | -1 |
| UTI | 12 | 55061 | -3 |
| GLOG | 13 | 9937 | 0 |
| MNK | 14 | 17565 | -4 |
| TLC | 1 | 513 | 0 |
| TBNK | 5 | 20117 | 1 |
| GIX | 10 | 50461 | 0 |
| Average | 8 | 22215 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $66 million in HMHC’s case. Mallinckrodt Public Limited Company (NYSE:MNK) is the most popular stock in this table. On the other hand ACNB Corporation (NASDAQ:ACNB) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Houghton Mifflin Harcourt Co (NASDAQ:HMHC) is more popular among hedge funds. Our overall hedge fund sentiment score for HMHC is 21.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Unfortunately HMHC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HMHC were disappointed as the stock returned -4.4% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
