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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Horace Mann Educators Corporation (NYSE:HMN).
Horace Mann Educators Corporation (NYSE:HMN) was in 11 hedge funds’ portfolios at the end of the fourth quarter of 2019. HMN shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 14 hedge funds in our database with HMN positions at the end of the previous quarter. Our calculations also showed that HMN 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.
John Overdeck of Two Sigma Advisors
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. Now let’s check out the recent hedge fund action surrounding Horace Mann Educators Corporation (NYSE:HMN).
What have hedge funds been doing with Horace Mann Educators Corporation (NYSE:HMN)?
At the end of the fourth quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HMN over the last 18 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.
Among these funds, Ariel Investments held the most valuable stake in Horace Mann Educators Corporation (NYSE:HMN), which was worth $11 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $5.7 million worth of shares. Renaissance Technologies, Two Sigma Advisors, and GLG Partners 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 Ariel Investments allocated the biggest weight to Horace Mann Educators Corporation (NYSE:HMN), around 0.14% of its 13F portfolio. ExodusPoint Capital is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to HMN.
Seeing as Horace Mann Educators Corporation (NYSE:HMN) has faced bearish sentiment from the smart money, it’s easy to see that there exists a select few funds who sold off their entire stakes in the third quarter. At the top of the heap, Gregg Moskowitz’s Interval Partners dropped the biggest investment of the 750 funds monitored by Insider Monkey, worth an estimated $0.6 million in stock, and Mike Vranos’s Ellington was right behind this move, as the fund sold off about $0.3 million worth. These transactions are important to note, as total hedge fund interest fell by 3 funds in the third quarter.
Let’s go over hedge fund activity in other stocks similar to Horace Mann Educators Corporation (NYSE:HMN). These stocks are Healthcare Services Group, Inc. (NASDAQ:HCSG), NetScout Systems, Inc. (NASDAQ:NTCT), Principia Biopharma Inc. (NASDAQ:PRNB), and Masonite International Corp (NYSE:DOOR). This group of stocks’ market values match HMN’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HCSG | 18 | 101640 | 2 |
| NTCT | 20 | 110982 | 6 |
| PRNB | 20 | 555851 | 8 |
| DOOR | 21 | 422459 | 3 |
| Average | 19.75 | 297733 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $298 million. That figure was $29 million in HMN’s case. Masonite International Corp (NYSE:DOOR) is the most popular stock in this table. On the other hand Healthcare Services Group, Inc. (NASDAQ:HCSG) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Horace Mann Educators Corporation (NYSE:HMN) is even less popular than HCSG. Hedge funds dodged a bullet by taking a bearish stance towards HMN. 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 HMN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); HMN investors were disappointed as the stock returned -24.1% 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.
