Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Sleep Number Corporation (NASDAQ:SNBR) to find out whether it was one of their high conviction long-term ideas.
Sleep Number Corporation (NASDAQ:SNBR) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 16 hedge funds’ portfolios at the end of the third quarter of 2019. At the end of this article we will also compare SNBR to other stocks including Arch Coal, Inc. (NYSE:ARCH), MSG Networks Inc (NYSE:MSGN), and Bright Scholar Education Holdings Limited (NYSE:BEDU) to get a better sense of its popularity.
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.
David E. Shaw of D.E. Shaw
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 take a peek at the recent hedge fund action encompassing Sleep Number Corporation (NASDAQ:SNBR).
How are hedge funds trading Sleep Number Corporation (NASDAQ:SNBR)?
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SNBR over the last 17 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, D E Shaw was the largest shareholder of Sleep Number Corporation (NASDAQ:SNBR), with a stake worth $52.7 million reported as of the end of September. Trailing D E Shaw was Arrowstreet Capital, which amassed a stake valued at $32.7 million. Citadel Investment Group, Millennium Management, and GLG Partners 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 PDT Partners allocated the biggest weight to Sleep Number Corporation (NASDAQ:SNBR), around 0.15% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, dishing out 0.08 percent of its 13F equity portfolio to SNBR.
Judging by the fact that Sleep Number Corporation (NASDAQ:SNBR) has witnessed a decline in interest from hedge fund managers, it’s safe to say that there is a sect of money managers that elected to cut their full holdings by the end of the third quarter. At the top of the heap, John Overdeck and David Siegel’s Two Sigma Advisors sold off the largest stake of the “upper crust” of funds monitored by Insider Monkey, totaling close to $3.1 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $1.5 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks similar to Sleep Number Corporation (NASDAQ:SNBR). These stocks are Arch Coal, Inc. (NYSE:ARCH), MSG Networks Inc (NYSE:MSGN), Bright Scholar Education Holdings Limited (NYSE:BEDU), and Raven Industries, Inc. (NASDAQ:RAVN). This group of stocks’ market caps resemble SNBR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ARCH | 26 | 298997 | -1 |
| MSGN | 31 | 267648 | 8 |
| BEDU | 9 | 116217 | 0 |
| RAVN | 11 | 92626 | -1 |
| Average | 19.25 | 193872 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $164 million in SNBR’s case. MSG Networks Inc (NYSE:MSGN) is the most popular stock in this table. On the other hand Bright Scholar Education Holdings Limited (NYSE:BEDU) is the least popular one with only 9 bullish hedge fund positions. Sleep Number Corporation (NASDAQ:SNBR) is not the least popular stock in this group but hedge fund interest is still below average. 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 SNBR as the stock returned 16.8% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
