It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in frontdoor, inc. (NASDAQ:FTDR).
frontdoor, inc. (NASDAQ:FTDR) shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. FTDR was in 38 hedge funds’ portfolios at the end of September. There were 40 hedge funds in our database with FTDR positions at the end of the previous quarter. Our calculations also showed that FTDR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Harold Levy of Iridian Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a glance at the fresh hedge fund action regarding frontdoor, inc. (NASDAQ:FTDR).
How have hedgies been trading frontdoor, inc. (NASDAQ:FTDR)?
At the end of the third quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 2 hedge funds with a bullish position in FTDR a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in frontdoor, inc. (NASDAQ:FTDR) was held by Iridian Asset Management, which reported holding $160.6 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $79 million position. Other investors bullish on the company included Engle Capital, Chilton Investment Company, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Engle Capital allocated the biggest weight to frontdoor, inc. (NASDAQ:FTDR), around 17.4% of its 13F portfolio. StackLine Partners is also relatively very bullish on the stock, designating 11.38 percent of its 13F equity portfolio to FTDR.
Due to the fact that frontdoor, inc. (NASDAQ:FTDR) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of fund managers that slashed their full holdings in the third quarter. It’s worth mentioning that John Lykouretzos’s Hoplite Capital Management dropped the biggest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $48.8 million in stock. Ravee Mehta’s fund, Nishkama Capital, also cut its stock, about $11.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to frontdoor, inc. (NASDAQ:FTDR). These stocks are Compania Cervecerias Unidas S.A. (NYSE:CCU), Cabot Microelectronics Corporation (NASDAQ:CCMP), NCR Corporation (NYSE:NCR), and Enstar Group Ltd. (NASDAQ:ESGR). All of these stocks’ market caps match FTDR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CCU | 9 | 32949 | -1 |
| CCMP | 15 | 348635 | 2 |
| NCR | 31 | 284836 | 7 |
| ESGR | 12 | 415383 | 2 |
| Average | 16.75 | 270451 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $270 million. That figure was $736 million in FTDR’s case. NCR Corporation (NYSE:NCR) is the most popular stock in this table. On the other hand Compania Cervecerias Unidas S.A. (NYSE:CCU) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks frontdoor, inc. (NASDAQ:FTDR) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on FTDR as the stock returned 76.9% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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.
