Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 12.1% in 2019 (through May 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 18.7% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like GameStop Corp. (NYSE:GME).
Hedge fund interest in GameStop Corp. (NYSE:GME) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare GME to other stocks including First Bancorp (NASDAQ:FBNC), AtriCure Inc. (NASDAQ:ATRC), and Northern Oil & Gas, Inc. (NYSEAMEX:NOG) to get a better sense of its popularity.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
We’re going to analyze the fresh hedge fund action regarding GameStop Corp. (NYSE:GME).
What does the smart money think about GameStop Corp. (NYSE:GME)?
At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in GME a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, D. E. Shaw’s D E Shaw has the largest position in GameStop Corp. (NYSE:GME), worth close to $14.1 million, accounting for less than 0.1%% of its total 13F portfolio. On D E Shaw’s heels is John Tompkins of Tyvor Capital, with a $13.8 million position; 3.3% of its 13F portfolio is allocated to the company. Some other peers with similar optimism consist of David Harding’s Winton Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Ken Griffin’s Citadel Investment Group.
Judging by the fact that GameStop Corp. (NYSE:GME) has faced falling interest from the aggregate hedge fund industry, we can see that there is a sect of fund managers that elected to cut their full holdings by the end of the third quarter. Interestingly, Ray Dalio’s Bridgewater Associates dumped the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $17.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dumped about $10.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to GameStop Corp. (NYSE:GME). These stocks are First Bancorp (NASDAQ:FBNC), AtriCure Inc. (NASDAQ:ATRC), Northern Oil & Gas, Inc. (NYSEAMEX:NOG), and Despegar.com, Corp. (NYSE:DESP). This group of stocks’ market valuations resemble GME’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FBNC | 16 | 97868 | 0 |
| ATRC | 25 | 123086 | 3 |
| NOG | 20 | 141448 | 4 |
| DESP | 15 | 226527 | -4 |
| Average | 19 | 147232 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $147 million. That figure was $88 million in GME’s case. AtriCure Inc. (NASDAQ:ATRC) is the most popular stock in this table. On the other hand Despegar.com, Corp. (NYSE:DESP) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks GameStop Corp. (NYSE:GME) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately GME wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on GME were disappointed as the stock returned -25.2% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
