Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. 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 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
CBIZ, Inc. (NYSE:CBZ) was in 10 hedge funds’ portfolios at the end of September. CBZ investors should pay attention to a decrease in hedge fund sentiment recently. There were 14 hedge funds in our database with CBZ holdings at the end of the previous quarter. Our calculations also showed that CBZ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the key hedge fund action encompassing CBIZ, Inc. (NYSE:CBZ).
How have hedgies been trading CBIZ, Inc. (NYSE:CBZ)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CBZ over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Cardinal Capital was the largest shareholder of CBIZ, Inc. (NYSE:CBZ), with a stake worth $71.8 million reported as of the end of September. Trailing Cardinal Capital was P2 Capital Partners, which amassed a stake valued at $70.2 million. Renaissance Technologies, D E Shaw, and AQR Capital 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 P2 Capital Partners allocated the biggest weight to CBIZ, Inc. (NYSE:CBZ), around 4.74% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, designating 2.37 percent of its 13F equity portfolio to CBZ.
Judging by the fact that CBIZ, Inc. (NYSE:CBZ) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedgies that elected to cut their entire stakes in the third quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace sold off the biggest investment of the 750 funds tracked by Insider Monkey, valued at about $2.2 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 $0.8 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as CBIZ, Inc. (NYSE:CBZ) but similarly valued. We will take a look at Tennant Company (NYSE:TNC), TTM Technologies, Inc. (NASDAQ:TTMI), Opko Health Inc. (NYSE:OPK), and SemGroup Corp (NYSE:SEMG). This group of stocks’ market caps are similar to CBZ’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TNC | 10 | 98330 | 4 |
| TTMI | 10 | 30036 | 1 |
| OPK | 13 | 10924 | -1 |
| SEMG | 18 | 120426 | 3 |
| Average | 12.75 | 64929 | 1.75 |
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 $65 million. That figure was $177 million in CBZ’s case. SemGroup Corp (NYSE:SEMG) is the most popular stock in this table. On the other hand Tennant Company (NYSE:TNC) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks CBIZ, Inc. (NYSE:CBZ) is even less popular than TNC. Hedge funds clearly dropped the ball on CBZ as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on CBZ as the stock returned 14.3% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
