Should You Avoid Graham Holdings Co (GHC)?

Hedge fund managers like David Einhorn, Dan Loeb, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Graham Holdings Co (NYSE:GHC) .

Is Graham Holdings Co (NYSE:GHC) undervalued? Prominent investors are actually taking a pessimistic view, judging by the number of investors tracked by Insider Monkey long the stock inched down by two to 17 during the third quarter. At the end of this article we will also compare GHC to other stocks including Ellie Mae Inc (NYSE:ELLI), Tenet Healthcare Corp (NYSE:THC), and Inovalon Holdings Inc (NASDAQ:INOV) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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With all of this in mind, we’re going to check out the key action surrounding Graham Holdings Co (NYSE:GHC).

Hedge fund activity in Graham Holdings Co (NYSE:GHC)

At the end of the third quarter, 17 funds tracked by Insider Monkey were long Graham Holdings Co (NYSE:GHC), down by 11% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in GHC at the beginning of this year. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Mason Hawkins’ Southeastern Asset Management has the largest position in Graham Holdings Co (NYSE:GHC), worth close to $380.1 million, amounting to 3.6% of its total 13F portfolio. The second most bullish fund manager is Berkshire Hathaway, led by Warren Buffett, holding a $51.8 million position; less than 0.1% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism comprise Cliff Asness’ AQR Capital Management, Scott Wallace’s Wallace Capital Management and Jim Simons’ Renaissance Technologies. We should note that Southeastern Asset Management is among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We already know that not all hedge funds are bullish on the stock and some hedge funds actually dropped their positions entirely. Interestingly, John Smith Clark’s Southpoint Capital Advisors dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $14.7 million in stock, and Prasad Phatak and Chris Koranda’s Tappan Street Partners was right behind this move, as the fund dropped about $4.4 million worth of shares.

Let’s check out hedge fund activity in other stocks similar to Graham Holdings Co (NYSE:GHC). These stocks are Ellie Mae Inc (NYSE:ELLI), Tenet Healthcare Corp (NYSE:THC), Inovalon Holdings Inc (NASDAQ:INOV), and CoreSite Realty Corp (NYSE:COR). This group of stocks’ market values are similar to GHC’s market value.

As you can see these stocks had an average of 21 funds with bullish positions and the average amount invested in these stocks was $279 million, compared to $595 million in GHC’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand Inovalon Holdings Inc (NASDAQ:INOV) is the least popular one with only four bullish hedge fund positions. Graham Holdings Co (NYSE:GHC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard Tenet Healthcare Corp (NYSE:THC) might be a better candidate to consider taking a long position in.