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Amid an overall bull market, many stocks that smart money investors were collectively bullish on 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. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Atlantica Yield plc (NASDAQ:AY) has seen an increase in activity from the world's largest hedge funds recently. AY was in 19 hedge funds' portfolios at the end of September. There were 18 hedge funds in our database with AY positions at the end of the previous quarter. Our calculations also showed that AY isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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 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 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.
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Philip Hempleman of Ardsley Partners[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a peek at the new hedge fund action encompassing Atlantica Yield plc (NASDAQ:AY).
What does smart money think about Atlantica Yield plc (NASDAQ:AY)?
At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the second quarter of 2019. By comparison, 20 hedge funds held shares or bullish call options in AY 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, Israel Englander's Millennium Management has the most valuable position in Atlantica Yield plc (NASDAQ:AY), worth close to $22.1 million, corresponding to less than 0.1%% of its total 13F portfolio. Coming in second is Melqart Asset Management, managed by Michel Massoud, which holds a $21 million position; 1.9% of its 13F portfolio is allocated to the stock. Other professional money managers that are bullish comprise Noam Gottesman's GLG Partners, Philip Hempleman's Ardsley Partners and Matthew Barrett's Glendon Capital Management. In terms of the portfolio weights assigned to each position Covalis Capital allocated the biggest weight to Atlantica Yield plc (NASDAQ:AY), around 10.52% of its 13F portfolio. Glendon Capital Management is also relatively very bullish on the stock, setting aside 3.32 percent of its 13F equity portfolio to AY.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Caxton Associates, managed by Bruce Kovner, initiated the largest position in Atlantica Yield plc (NASDAQ:AY). Caxton Associates had $1.1 million invested in the company at the end of the quarter. Minhua Zhang's Weld Capital Management also made a $0.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Gavin Saitowitz and Cisco J. del Valle's Springbok Capital and Donald Sussman's Paloma Partners.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Atlantica Yield plc (NASDAQ:AY) but similarly valued. These stocks are Universal Forest Products, Inc. (NASDAQ:UFPI), Box, Inc. (NYSE:BOX), Allegiant Travel Company (NASDAQ:ALGT), and Werner Enterprises, Inc. (NASDAQ:WERN). This group of stocks' market values match AY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UFPI,20,79055,3 BOX,31,553721,4 ALGT,16,530035,-2 WERN,18,112767,3 Average,21.25,318895,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $319 million. That figure was $153 million in AY's case. Box, Inc. (NYSE:BOX) is the most popular stock in this table. On the other hand Allegiant Travel Company (NASDAQ:ALGT) is the least popular one with only 16 bullish hedge fund positions. Atlantica Yield plc (NASDAQ:AY) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on AY, though not to the same extent, as the stock returned 9.3% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.