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 approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month 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 Discovery, Inc. (NASDAQ:DISCK).
Hedge fund interest in Discovery, Inc. (NASDAQ:DISCK) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare DISCK to other stocks including Burlington Stores Inc (NYSE:BURL), W.R. Berkley Corporation (NYSE:WRB), and The Liberty SiriusXM Group (NASDAQ:LSXMA) to get a better sense of its popularity. 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' 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_25305" align="aligncenter" width="600"] John Paulson of Paulson & Co[/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. We're going to take a peek at the latest hedge fund action regarding Discovery, Inc. (NASDAQ:DISCK).
How are hedge funds trading Discovery, Inc. (NASDAQ:DISCK)?
Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 34 hedge funds held shares or bullish call options in DISCK a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
Among these funds, Paulson & Co held the most valuable stake in Discovery, Inc. (NASDAQ:DISCK), which was worth $268.9 million at the end of the third quarter. On the second spot was CQS Cayman LP which amassed $135.8 million worth of shares. Hudson Bay Capital Management, Citadel Investment Group, and GAMCO Investors 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 CQS Cayman LP allocated the biggest weight to Discovery, Inc. (NASDAQ:DISCK), around 6% of its portfolio. Paulson & Co is also relatively very bullish on the stock, earmarking 5.39 percent of its 13F equity portfolio to DISCK.
Since Discovery, Inc. (NASDAQ:DISCK) has experienced a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few hedge funds that elected to cut their positions entirely heading into Q4. Intriguingly, Steve Pigott's Fort Baker Capital Management cut the largest position of the "upper crust" of funds watched by Insider Monkey, valued at about $5.8 million in stock, and Nick Niell's Arrowgrass Capital Partners was right behind this move, as the fund dropped about $2.7 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Discovery, Inc. (NASDAQ:DISCK) but similarly valued. We will take a look at Burlington Stores Inc (NYSE:BURL), W.R. Berkley Corporation (NYSE:WRB), The Liberty SiriusXM Group (NASDAQ:LSXMA), and CrowdStrike Holdings, Inc. (NASDAQ:CRWD). All of these stocks' market caps match DISCK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BURL,37,1512597,6 WRB,21,337881,-2 LSXMA,39,1484908,5 CRWD,28,273644,-13 Average,31.25,902258,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $902 million. That figure was $727 million in DISCK's case. The Liberty SiriusXM Group (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand W.R. Berkley Corporation (NYSE:WRB) is the least popular one with only 21 bullish hedge fund positions. Discovery, Inc. (NASDAQ:DISCK) 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 DISCK as the stock returned 24% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.