Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)? The smart money sentiment can provide an answer to this question.
Is Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) undervalued? The smart money is selling. The number of long hedge fund bets went down by 3 in recent months. Our calculations also showed that PLAY 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.
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.
Israel Englander of Millennium Management
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. Let’s review the key hedge fund action surrounding Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY).
Hedge fund activity in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)
At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PLAY 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.
The largest stake in Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) was held by Hill Path Capital, which reported holding $70.4 million worth of stock at the end of September. It was followed by Senator Investment Group with a $58.4 million position. Other investors bullish on the company included Arrowstreet Capital, Millennium Management, and Indaba Capital Management. In terms of the portfolio weights assigned to each position Hill Path Capital allocated the biggest weight to Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY), around 8.96% of its 13F portfolio. Sheffield Asset Management is also relatively very bullish on the stock, setting aside 7.89 percent of its 13F equity portfolio to PLAY.
Due to the fact that Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) has witnessed declining sentiment from hedge fund managers, we can see that there exists a select few funds that slashed their entire stakes in the third quarter. Intriguingly, Parag Vora’s HG Vora Capital Management sold off the largest position of the “upper crust” of funds monitored by Insider Monkey, comprising about $80.9 million in stock, and Clifton S. Robbins’s Blue Harbour Group was right behind this move, as the fund cut about $27.1 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) but similarly valued. These stocks are The Children’s Place Inc. (NASDAQ:PLCE), GMS Inc. (NYSE:GMS), OneSmart International Education Group Limited (NYSE:ONE), and United Fire Group, Inc. (NASDAQ:UFCS). This group of stocks’ market caps match PLAY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PLCE | 20 | 247278 | 1 |
| GMS | 23 | 130082 | 3 |
| ONE | 8 | 54613 | 1 |
| UFCS | 8 | 13556 | -2 |
| Average | 14.75 | 111382 | 0.75 |
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 $111 million. That figure was $279 million in PLAY’s case. GMS Inc. (NYSE:GMS) is the most popular stock in this table. On the other hand OneSmart International Education Group Limited (NYSE:ONE) is the least popular one with only 8 bullish hedge fund positions. Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately PLAY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PLAY were disappointed as the stock returned 3.6% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
