Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Lee Enterprises, Incorporated (NYSE:LEE).
Lee Enterprises, Incorporated (NYSE:LEE) investors should be aware of an increase in hedge fund interest of late. LEE was in 12 hedge funds' portfolios at the end of September. There were 10 hedge funds in our database with LEE holdings at the end of the previous quarter. Our calculations also showed that LEE 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_728717" align="aligncenter" width="473"] Roger Ibbotson of Zebra Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's go over the latest hedge fund action surrounding Lee Enterprises, Incorporated (NYSE:LEE).
What does smart money think about Lee Enterprises, Incorporated (NYSE:LEE)?
At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in LEE over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Cannell Capital held the most valuable stake in Lee Enterprises, Incorporated (NYSE:LEE), which was worth $9.3 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $0.6 million worth of shares. Winton Capital Management, Zebra Capital Management, and Manatuck Hill Partners 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 Cannell Capital allocated the biggest weight to Lee Enterprises, Incorporated (NYSE:LEE), around 3.03% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, dishing out 0.22 percent of its 13F equity portfolio to LEE.
With a general bullishness amongst the heavyweights, some big names have jumped into Lee Enterprises, Incorporated (NYSE:LEE) headfirst. Winton Capital Management, managed by David Harding, initiated the most valuable position in Lee Enterprises, Incorporated (NYSE:LEE). Winton Capital Management had $0.6 million invested in the company at the end of the quarter. Andre F. Perold's HighVista Strategies also made a $0.1 million investment in the stock during the quarter. The other funds with brand new LEE positions are Chuck Royce's Royce & Associates, Ken Griffin's Citadel Investment Group, and John Overdeck and David Siegel's Two Sigma Advisors.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Lee Enterprises, Incorporated (NYSE:LEE) but similarly valued. We will take a look at Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE), Flexsteel Industries, Inc. (NASDAQ:FLXS), Aptinyx Inc. (NASDAQ:APTX), and Smart Sand, Inc. (NASDAQ:SND). This group of stocks' market valuations match LEE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CSSE,1,3245,0 FLXS,7,19339,1 APTX,8,15552,0 SND,10,5533,3 Average,6.5,10917,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $11 million. That figure was $11 million in LEE's case. Smart Sand, Inc. (NASDAQ:SND) is the most popular stock in this table. On the other hand Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Lee Enterprises, Incorporated (NYSE:LEE) is more popular among hedge funds. 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 LEE wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LEE were disappointed as the stock returned -4.9% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.