Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Is BEST Inc. (NYSE:BEST) a sound stock to buy now? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund bets shrunk by 3 in recent months. Our calculations also showed that BEST isn't among the 30 most popular stocks among hedge funds (see the video below). BEST was in 13 hedge funds' portfolios at the end of June. There were 16 hedge funds in our database with BEST holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the fresh hedge fund action encompassing BEST Inc. (NYSE:BEST).
How are hedge funds trading BEST Inc. (NYSE:BEST)?
At the end of the second quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in BEST over the last 16 quarters. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in BEST Inc. (NYSE:BEST) was held by Tiger Pacific Capital, which reported holding $17.7 million worth of stock at the end of March. It was followed by Indus Capital with a $7.6 million position. Other investors bullish on the company included Masters Capital Management, Dalton Investments, and Millennium Management.
Because BEST Inc. (NYSE:BEST) has witnessed falling interest from the entirety of the hedge funds we track, it's safe to say that there is a sect of money managers that elected to cut their entire stakes heading into Q3. Interestingly, Hari Hariharan's NWI Management dumped the largest investment of the 750 funds monitored by Insider Monkey, valued at close to $5.9 million in stock. Richard Driehaus's fund, Driehaus Capital, also dumped its stock, about $0.9 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to BEST Inc. (NYSE:BEST). These stocks are InVitae Corporation (NYSE:NVTA), Commercial Metals Company (NYSE:CMC), Zai Lab Limited (NASDAQ:ZLAB), and Select Medical Holdings Corporation (NYSE:SEM). This group of stocks' market values are similar to BEST's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVTA,16,328969,-12 CMC,17,289611,6 ZLAB,17,240494,0 SEM,17,131929,-4 Average,16.75,247751,-2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $248 million. That figure was $49 million in BEST's case. Commercial Metals Company (NYSE:CMC) is the most popular stock in this table. On the other hand InVitae Corporation (NYSE:NVTA) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks BEST Inc. (NYSE:BEST) is even less popular than NVTA. Hedge funds dodged a bullet by taking a bearish stance towards BEST. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately BEST wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); BEST investors were disappointed as the stock returned -4.2% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.