Were Hedge Funds Right About Selling GreenSky, Inc. (GSKY)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards GreenSky, Inc. (NASDAQ:GSKY).

Is GreenSky, Inc. (NASDAQ:GSKY) the right investment to pursue these days? Investors who are in the know are selling. The number of long hedge fund positions retreated by 4 lately. Our calculations also showed that GSKY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

Paul Reeder of PAR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a peek at the key hedge fund action encompassing GreenSky, Inc. (NASDAQ:GSKY).

How have hedgies been trading GreenSky, Inc. (NASDAQ:GSKY)?

Heading into the first quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in GSKY a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

The largest stake in GreenSky, Inc. (NASDAQ:GSKY) was held by Balyasny Asset Management, which reported holding $10.5 million worth of stock at the end of September. It was followed by D E Shaw with a $8.4 million position. Other investors bullish on the company included Adage Capital Management, PAR Capital Management, and Isomer Partners. In terms of the portfolio weights assigned to each position Isomer Partners allocated the biggest weight to GreenSky, Inc. (NASDAQ:GSKY), around 1.67% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, dishing out 0.12 percent of its 13F equity portfolio to GSKY.

Seeing as GreenSky, Inc. (NASDAQ:GSKY) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there were a few money managers that decided to sell off their positions entirely in the third quarter. Intriguingly, Alok Agrawal’s Bloom Tree Partners said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, comprising close to $7.3 million in stock. Daryl Smith’s fund, Kayak Investment Partners, also dropped its stock, about $4.5 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 4 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to GreenSky, Inc. (NASDAQ:GSKY). These stocks are Arvinas, Inc. (NASDAQ:ARVN), Allscripts Healthcare Solutions Inc (NASDAQ:MDRX), Calavo Growers, Inc. (NASDAQ:CVGW), and Uniti Group Inc. (NASDAQ:UNIT). This group of stocks’ market valuations are closest to GSKY’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $249 million. That figure was $37 million in GSKY’s case. Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) is the most popular stock in this table. On the other hand Uniti Group Inc. (NASDAQ:UNIT) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks GreenSky, Inc. (NASDAQ:GSKY) is even less popular than UNIT. Hedge funds dodged a bullet by taking a bearish stance towards GSKY. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately GSKY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GSKY investors were disappointed as the stock returned -62.5% during the same time period 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 most of these stocks already outperformed the market so far in 2020.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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