Tencent Music Entertainment (TME): Hedge Funds Taking Some Chips Off The Table

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Tencent Music Entertainment Group (NYSE:TME).

Tencent Music Entertainment Group (NYSE:TME) investors should pay attention to a decrease in activity from the world’s largest hedge funds of late. TME was in 25 hedge funds’ portfolios at the end of March. There were 26 hedge funds in our database with TME holdings at the end of the previous quarter. Our calculations also showed that TME isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.

Daniel Sundheim of D1 Capital Partners

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the key hedge fund action encompassing Tencent Music Entertainment Group (NYSE:TME).

How have hedgies been trading Tencent Music Entertainment Group (NYSE:TME)?

Heading into the second quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2019. By comparison, 20 hedge funds held shares or bullish call options in TME a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Daniel Sundheim’s D1 Capital Partners has the most valuable position in Tencent Music Entertainment Group (NYSE:TME), worth close to $127.1 million, accounting for 1.3% of its total 13F portfolio. On D1 Capital Partners’s heels is Eashwar Krishnan of Tybourne Capital Management, with a $80.6 million position; the fund has 2.9% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism encompass Run Ye, Junji Takegami and Hoyon Hwang’s Tiger Pacific Capital, Michael Blitzer’s Kingstown Capital Management and Chase Coleman’s Tiger Global Management LLC. In terms of the portfolio weights assigned to each position Tiger Pacific Capital allocated the biggest weight to Tencent Music Entertainment Group (NYSE:TME), around 22.51% of its 13F portfolio. Hidden Lake Asset Management is also relatively very bullish on the stock, earmarking 12.47 percent of its 13F equity portfolio to TME.

Seeing as Tencent Music Entertainment Group (NYSE:TME) has faced falling interest from hedge fund managers, logic holds that there lies a certain “tier” of funds that decided to sell off their positions entirely heading into Q4. Intriguingly, David Fiszel’s Honeycomb Asset Management cut the biggest stake of the “upper crust” of funds followed by Insider Monkey, worth close to $74.3 million in stock, and Simon Sadler’s Segantii Capital was right behind this move, as the fund sold off about $7 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Tencent Music Entertainment Group (NYSE:TME). We will take a look at Simon Property Group, Inc (NYSE:SPG), CMS Energy Corporation (NYSE:CMS), Parker-Hannifin Corporation (NYSE:PH), and DocuSign, Inc. (NASDAQ:DOCU). This group of stocks’ market valuations are closest to TME’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $703 million. That figure was $456 million in TME’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand CMS Energy Corporation (NYSE:CMS) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Tencent Music Entertainment Group (NYSE:TME) is even less popular than CMS. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th but managed to beat the market by 14.2 percentage points. A small number of hedge funds were also right about betting on TME, though not to the same extent, as the stock returned 24.4% during the second quarter (through June 10th) and outperformed the market as well.

Disclosure: None. This article was originally published at Insider Monkey.