Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.
Is Yum China Holdings, Inc. (NYSE:YUMC) undervalued? Money managers are taking a pessimistic view. The number of long hedge fund bets dropped by 2 lately. Our calculations also showed that YUMC isn’t among the 30 most popular stocks among hedge funds (view the video below). YUMC was in 28 hedge funds’ portfolios at the end of June. There were 30 hedge funds in our database with YUMC holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a glance at the recent hedge fund action regarding Yum China Holdings, Inc. (NYSE:YUMC).
How have hedgies been trading Yum China Holdings, Inc. (NYSE:YUMC)?
Heading into the third quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in YUMC over the last 16 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Yum China Holdings, Inc. (NYSE:YUMC), with a stake worth $90 million reported as of the end of March. Trailing Renaissance Technologies was GLG Partners, which amassed a stake valued at $58.6 million. AQR Capital Management, Platinum Asset Management, and Driehaus Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Yum China Holdings, Inc. (NYSE:YUMC) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few money managers who were dropping their positions entirely in the second quarter. It’s worth mentioning that Mason Hawkins’s Southeastern Asset Management dropped the biggest investment of all the hedgies monitored by Insider Monkey, totaling close to $45.5 million in stock, and Howard Marks’s Oaktree Capital Management was right behind this move, as the fund sold off about $33.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds in the second quarter.
Let’s check out hedge fund activity in other stocks similar to Yum China Holdings, Inc. (NYSE:YUMC). These stocks are Loews Corporation (NYSE:L), Nucor Corporation (NYSE:NUE), Arthur J. Gallagher & Co. (NYSE:AJG), and Altice USA, Inc. (NYSE:ATUS). This group of stocks’ market values match YUMC’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| L | 21 | 258588 | 1 |
| NUE | 22 | 237610 | -4 |
| AJG | 25 | 318008 | -3 |
| ATUS | 45 | 2879579 | -7 |
| Average | 28.25 | 923446 | -3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $923 million. That figure was $448 million in YUMC’s case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand Loews Corporation (NYSE:L) is the least popular one with only 21 bullish hedge fund positions. Yum China Holdings, Inc. (NYSE:YUMC) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately YUMC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); YUMC investors were disappointed as the stock returned -1.4% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.
