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Is Allied Esports Entertainment, Inc. (AESE) Going to Burn These Hedge Funds?

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Allied Esports Entertainment, Inc. (NASDAQ:AESE).

Is Allied Esports Entertainment, Inc. (NASDAQ:AESE) the right pick for your portfolio? Money managers are getting less optimistic. The number of long hedge fund positions fell by 6 lately. Our calculations also showed that AESE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). AESE was in 3 hedge funds' portfolios at the end of September. There were 9 hedge funds in our database with AESE positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? 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_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. Now we're going to take a look at the key hedge fund action regarding Allied Esports Entertainment, Inc. (NASDAQ:AESE).

Hedge fund activity in Allied Esports Entertainment, Inc. (NASDAQ:AESE)

At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -67% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AESE over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is AESE A Good Stock To Buy?

More specifically, Royce & Associates was the largest shareholder of Allied Esports Entertainment, Inc. (NASDAQ:AESE), with a stake worth $0.9 million reported as of the end of September. Trailing Royce & Associates was Millennium Management, which amassed a stake valued at $0.5 million. Hudson Bay Capital Management was 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 Royce & Associates allocated the biggest weight to Allied Esports Entertainment, Inc. (NASDAQ:AESE), around 0.01% of its 13F portfolio. Hudson Bay Capital Management is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to AESE.

Seeing as Allied Esports Entertainment, Inc. (NASDAQ:AESE) has faced bearish sentiment from hedge fund managers, it's easy to see that there exists a select few funds that elected to cut their entire stakes heading into Q4. Intriguingly, Andrew Weiss's Weiss Asset Management sold off the largest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $13.9 million in stock. Phillip Goldstein, Andrew Dakos and Steven Samuels's fund, Bulldog Investors, also sold off its stock, about $3.7 million worth. These moves are interesting, as total hedge fund interest was cut by 6 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to Allied Esports Entertainment, Inc. (NASDAQ:AESE). These stocks are Pyxus International, Inc. (NASDAQ:PYX), Gaiam, Inc. (NASDAQ:GAIA), Nantkwest Inc (NASDAQ:NK), and Novavax, Inc. (NASDAQ:NVAX). This group of stocks' market values are closest to AESE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PYX,5,7889,-5 GAIA,6,12663,-3 NK,6,3375,-1 NVAX,7,1967,4 Average,6,6474,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $2 million in AESE's case. Novavax, Inc. (NASDAQ:NVAX) is the most popular stock in this table. On the other hand Pyxus International, Inc. (NASDAQ:PYX) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Allied Esports Entertainment, Inc. (NASDAQ:AESE) is even less popular than PYX. Hedge funds dodged a bullet by taking a bearish stance towards AESE. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AESE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AESE investors were disappointed as the stock returned -53.2% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.

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

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