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. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Zhihu Inc. (NYSE:ZH) to find out whether there were any major changes in hedge funds’ views.
Is Zhihu Inc. (NYSE:ZH) a buy here? The best stock pickers were getting less bullish. The number of bullish hedge fund bets went down by 13 lately. Zhihu Inc. (NYSE:ZH) was in 10 hedge funds’ portfolios at the end of June. The all time high for this statistic is 23. Our calculations also showed that ZH isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).
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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.
Christian Leone of Luxor Capital Group
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to check out the new hedge fund action encompassing Zhihu Inc. (NYSE:ZH).
Do Hedge Funds Think ZH Is A Good Stock To Buy Now?
At second quarter’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -57% from the first quarter of 2020. On the other hand, there were a total of 0 hedge funds with a bullish position in ZH a year ago. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, 0 held the most valuable stake in Zhihu Inc. (NYSE:ZH), which was worth $55.1 million at the end of the second quarter. On the second spot was Sylebra Capital Management which amassed $44.4 million worth of shares. Panview Capital, Jericho Capital Asset Management, and Anatole Investment 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 Panview Capital allocated the biggest weight to Zhihu Inc. (NYSE:ZH), around 11.77% of its 13F portfolio. Sylebra Capital Management is also relatively very bullish on the stock, setting aside 1.1 percent of its 13F equity portfolio to ZH.
Judging by the fact that Zhihu Inc. (NYSE:ZH) has faced falling interest from hedge fund managers, we can see that there exists a select few hedge funds that decided to sell off their entire stakes heading into Q3. Intriguingly, Jonathan Barrett and Paul Segal’s Luminus Management sold off the biggest position of all the hedgies tracked by Insider Monkey, totaling about $18.4 million in stock. Karthik Sarma’s fund, SRS Investment Management, also sold off its stock, about $17 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 13 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Zhihu Inc. (NYSE:ZH) but similarly valued. These stocks are II-VI, Inc. (NASDAQ:IIVI), Crocs, Inc. (NASDAQ:CROX), Old Republic International Corporation (NYSE:ORI), Shift4 Payments, Inc. (NYSE:FOUR), Kingsoft Cloud Holdings Limited (NASDAQ:KC), Chemed Corporation (NYSE:CHE), and Ternium S.A. (NYSE:TX). This group of stocks’ market caps resemble ZH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IIVI | 29 | 274377 | -10 |
| CROX | 40 | 931239 | 9 |
| ORI | 26 | 366916 | 2 |
| FOUR | 31 | 615370 | -2 |
| KC | 12 | 67297 | -4 |
| CHE | 30 | 313539 | 6 |
| TX | 15 | 213272 | 1 |
| Average | 26.1 | 397430 | 0.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $397 million. That figure was $143 million in ZH’s case. Crocs, Inc. (NASDAQ:CROX) is the most popular stock in this table. On the other hand Kingsoft Cloud Holdings Limited (NASDAQ:KC) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Zhihu Inc. (NYSE:ZH) is even less popular than KC. Our overall hedge fund sentiment score for ZH is 5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds dodged a bullet by taking a bearish stance towards ZH. Our calculations showed that the top 5 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.7% in 2021 through September 27th but managed to beat the market again by 6.2 percentage points. Unfortunately ZH wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); ZH investors were disappointed as the stock returned -35% since the end of the second quarter (through 9/27) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
