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 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 15.1% over the last 12 months (vs. 5.6% gain for SPY), with 53% of these stocks outperforming the benchmark. 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 2U Inc (NASDAQ:TWOU).
2U Inc (NASDAQ:TWOU) was in 14 hedge funds’ portfolios at the end of September. TWOU shareholders have witnessed a decrease in hedge fund sentiment of late. There were 19 hedge funds in our database with TWOU positions at the end of the previous quarter. Our calculations also showed that twou isn’t among the 30 most popular stocks among hedge funds.
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 18 percentage points since May 2014 through December 3, 2018 (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 review the latest hedge fund action surrounding 2U Inc (NASDAQ:TWOU).
What have hedge funds been doing with 2U Inc (NASDAQ:TWOU)?
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from one quarter earlier. By comparison, 14 hedge funds held shares or bullish call options in TWOU heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in 2U Inc (NASDAQ:TWOU) was held by D E Shaw, which reported holding $37.5 million worth of stock at the end of September. It was followed by Polar Capital with a $33.2 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Diker Management.
Seeing as 2U Inc (NASDAQ:TWOU) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there was a specific group of hedgies who sold off their full holdings in the third quarter. At the top of the heap, Principal Global Investors’s Columbus Circle Investors said goodbye to the biggest position of the 700 funds tracked by Insider Monkey, valued at close to $34.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $6.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 5 funds in the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as 2U Inc (NASDAQ:TWOU) but similarly valued. These stocks are ONE Gas Inc (NYSE:OGS), Pluralsight, Inc. (NASDAQ:PS), Wyndham Destinations, Inc. (NYSE:WYND), and Hutchison China MediTech Limited (NASDAQ:HCM). This group of stocks’ market valuations resemble TWOU’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OGS | 15 | 89424 | 1 |
| PS | 13 | 137671 | -3 |
| WYND | 22 | 606708 | -7 |
| HCM | 9 | 13734 | -1 |
| Average | 14.75 | 211884 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $212 million. That figure was $119 million in TWOU’s case. Wyndham Destinations, Inc. (NYSE:WYND) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 9 bullish hedge fund positions. 2U Inc (NASDAQ:TWOU) 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. In this regard WYND might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
