Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like H&E Equipment Services, Inc. (NASDAQ:HEES).
Is H&E Equipment Services, Inc. (NASDAQ:HEES) the right investment to pursue these days? The best stock pickers are reducing their bets on the stock. The number of bullish hedge fund bets dropped by 2 lately. Our calculations also showed that HEES isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Paul Marshall of Marshall Wace
Let’s review the new hedge fund action encompassing H&E Equipment Services, Inc. (NASDAQ:HEES).
How have hedgies been trading H&E Equipment Services, Inc. (NASDAQ:HEES)?
At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards HEES over the last 15 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Buckingham Capital Management held the most valuable stake in H&E Equipment Services, Inc. (NASDAQ:HEES), which was worth $9.7 million at the end of the first quarter. On the second spot was Marshall Wace LLP which amassed $8.8 million worth of shares. Moreover, SG Capital Management, Two Sigma Advisors, and PEAK6 Capital Management were also bullish on H&E Equipment Services, Inc. (NASDAQ:HEES), allocating a large percentage of their portfolios to this stock.
Because H&E Equipment Services, Inc. (NASDAQ:HEES) has witnessed bearish sentiment from the smart money, logic holds that there is a sect of hedge funds who were dropping their full holdings by the end of the third quarter. It’s worth mentioning that Phill Gross and Robert Atchinson’s Adage Capital Management cut the largest stake of the 700 funds watched by Insider Monkey, valued at an estimated $0.8 million in stock. Mike Vranos’s fund, Ellington, also sold off its stock, about $0.5 million worth. These transactions are interesting, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as H&E Equipment Services, Inc. (NASDAQ:HEES) but similarly valued. These stocks are BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX), Y-mAbs Therapeutics, Inc. (NASDAQ:YMAB), Chatham Lodging Trust (NYSE:CLDT), and TCG BDC, Inc. (NASDAQ:CGBD). This group of stocks’ market caps are closest to HEES’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BCRX | 19 | 358451 | 1 |
| YMAB | 4 | 53052 | -2 |
| CLDT | 7 | 50262 | -3 |
| CGBD | 12 | 24463 | 2 |
| Average | 10.5 | 121557 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $122 million. That figure was $33 million in HEES’s case. BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX) is the most popular stock in this table. On the other hand Y-mAbs Therapeutics, Inc. (NASDAQ:YMAB) is the least popular one with only 4 bullish hedge fund positions. H&E Equipment Services, Inc. (NASDAQ:HEES) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on HEES as the stock returned 12.7% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
