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2019 Review: Top Hedge Fund Stocks vs. Skyline Corporation (SKY)

Debasis Saha

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Skyline Corporation (NYSE:SKY).

Hedge fund interest in Skyline Corporation (NYSE:SKY) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Fanhua Inc. (NASDAQ:FANH), Enerplus Corp (NYSE:ERF), and SPS Commerce, Inc. (NASDAQ:SPSC) to gather more data points. Our calculations also showed that SKY isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_221556" align="alignnone" width="600"] Richard Driehaus of Driehaus Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind let's take a glance at the new hedge fund action regarding Skyline Corporation (NYSE:SKY).

What does smart money think about Skyline Corporation (NYSE:SKY)?

At Q3's end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in SKY over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SKY A Good Stock To Buy?

Among these funds, MAK Capital One held the most valuable stake in Skyline Corporation (NYSE:SKY), which was worth $101.4 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $28.6 million worth of shares. Newtyn Management, 12th Street Asset Management, and Adage Capital Management 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 MAK Capital One allocated the biggest weight to Skyline Corporation (NYSE:SKY), around 40.51% of its 13F portfolio. Spitfire Capital is also relatively very bullish on the stock, setting aside 7.23 percent of its 13F equity portfolio to SKY.

Due to the fact that Skyline Corporation (NYSE:SKY) has experienced a decline in interest from hedge fund managers, we can see that there lies a certain "tier" of money managers who were dropping their positions entirely in the third quarter. It's worth mentioning that Philip Hempleman's Ardsley Partners cut the largest position of all the hedgies tracked by Insider Monkey, comprising close to $3.9 million in stock, and John Osterweis's Osterweis Capital Management was right behind this move, as the fund said goodbye to about $3.6 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now take a look at hedge fund activity in other stocks similar to Skyline Corporation (NYSE:SKY). We will take a look at Fanhua Inc. (NASDAQ:FANH), Enerplus Corp (NYSE:ERF), SPS Commerce, Inc. (NASDAQ:SPSC), and Progress Software Corporation (NASDAQ:PRGS). All of these stocks' market caps are closest to SKY's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FANH,8,16703,-1 ERF,15,155867,3 SPSC,17,142840,-1 PRGS,21,206788,-3 Average,15.25,130550,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $284 million in SKY's case. Progress Software Corporation (NASDAQ:PRGS) is the most popular stock in this table. On the other hand Fanhua Inc. (NASDAQ:FANH) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Skyline Corporation (NYSE:SKY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on SKY as the stock returned 115.8% in 2019 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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