Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% 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 is wise to check hedge fund activity before you invest your time or your savings on a stock like Brookdale Senior Living, Inc. (NYSE:BKD).
Is Brookdale Senior Living, Inc. (NYSE:BKD) undervalued? Money managers are in a pessimistic mood. The number of long hedge fund bets retreated by 2 in recent months. Our calculations also showed that BKD 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_364894" align="aligncenter" width="529"] James E. Flynn of Deerfield Management[/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 look at the key hedge fund action regarding Brookdale Senior Living, Inc. (NYSE:BKD).
How have hedgies been trading Brookdale Senior Living, Inc. (NYSE:BKD)?
Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in BKD a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
The largest stake in Brookdale Senior Living, Inc. (NYSE:BKD) was held by Glenview Capital, which reported holding $133.7 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $98.5 million position. Other investors bullish on the company included Camber Capital Management, Deerfield Management, and Land & Buildings Investment Management. In terms of the portfolio weights assigned to each position Land & Buildings Investment Management allocated the biggest weight to Brookdale Senior Living, Inc. (NYSE:BKD), around 11.48% of its 13F portfolio. North Run Capital is also relatively very bullish on the stock, earmarking 7.2 percent of its 13F equity portfolio to BKD.
Seeing as Brookdale Senior Living, Inc. (NYSE:BKD) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few hedge funds that elected to cut their full holdings by the end of the third quarter. Interestingly, Steve Cohen's Point72 Asset Management dumped the largest stake of all the hedgies watched by Insider Monkey, totaling about $5.6 million in stock. James Thomas Berylson's fund, Berylson Capital Partners, also dumped its stock, about $4.7 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks similar to Brookdale Senior Living, Inc. (NYSE:BKD). We will take a look at Coherus Biosciences Inc (NASDAQ:CHRS), Presidio, Inc. (NASDAQ:PSDO), Hercules Capital Inc (NYSE:HTGC), and First Busey Corporation (NASDAQ:BUSE). This group of stocks' market valuations are closest to BKD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHRS,22,213990,-5 PSDO,22,189614,3 HTGC,9,23447,-3 BUSE,10,43773,-1 Average,15.75,117706,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $478 million in BKD's case. Coherus Biosciences Inc (NASDAQ:CHRS) is the most popular stock in this table. On the other hand Hercules Capital Inc (NYSE:HTGC) is the least popular one with only 9 bullish hedge fund positions. Brookdale Senior Living, Inc. (NYSE:BKD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately BKD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BKD were disappointed as the stock returned -5.8% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.