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Is China Southern Airlines Co Ltd (ZNH) A Good Stock To Buy?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards China Southern Airlines Co Ltd (NYSE:ZNH).

Is ZNH a good stock to buy? Hedge fund interest in China Southern Airlines Co Ltd (NYSE:ZNH) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that ZNH isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Solaredge Technologies Inc (NASDAQ:SEDG), Bio-Techne Corporation (NASDAQ:TECH), and Liberty Global plc (NASDAQ:LBTYA) to gather more data points.

To most traders, hedge funds are perceived as underperforming, old financial vehicles of the past. While there are over 8000 funds in operation today, We choose to focus on the leaders of this club, approximately 850 funds. These investment experts direct the lion's share of the hedge fund industry's total asset base, and by keeping an eye on their first-class equity investments, Insider Monkey has come up with a number of investment strategies that have historically outperformed Mr. Market. Insider Monkey's flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Also, our monthly newsletter's portfolio of long stock picks returned 206.8% since March 2017 (through May 2021) and beat the S&P 500 Index by more than 115 percentage points. You can download a sample issue of this newsletter on our website.

Peter Rathjens Arrowstreet Capital 394
Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let's analyze the recent hedge fund action encompassing China Southern Airlines Co Ltd (NYSE:ZNH).

Do Hedge Funds Think ZNH Is A Good Stock To Buy Now?

At Q1's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 2 hedge funds held shares or bullish call options in ZNH a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of China Southern Airlines Co Ltd (NYSE:ZNH), with a stake worth $12.3 million reported as of the end of March. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $2.9 million. Citadel Investment Group was 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 0 allocated the biggest weight to China Southern Airlines Co Ltd (NYSE:ZNH), around 0.02% of its 13F portfolio. 0 is also relatively very bullish on the stock, earmarking 0.0039 percent of its 13F equity portfolio to ZNH.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace LLP. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).

Let's go over hedge fund activity in other stocks similar to China Southern Airlines Co Ltd (NYSE:ZNH). These stocks are Solaredge Technologies Inc (NASDAQ:SEDG), Bio-Techne Corporation (NASDAQ:TECH), Liberty Global plc (NASDAQ:LBTYA), The Boston Beer Company Inc (NYSE:SAM), Devon Energy Corporation (NYSE:DVN), Ares Management Corp (NYSE:ARES), and Cognex Corporation (NASDAQ:CGNX). This group of stocks' market valuations are closest to ZNH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SEDG,32,420741,4 TECH,23,411800,-1 LBTYA,35,848078,-1 SAM,29,903673,-6 DVN,52,1466337,7 ARES,16,565174,-4 CGNX,34,498509,3 Average,31.6,730616,0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $731 million. That figure was $16 million in ZNH's case. Devon Energy Corporation (NYSE:DVN) is the most popular stock in this table. On the other hand Ares Management Corp (NYSE:ARES) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks China Southern Airlines Co Ltd (NYSE:ZNH) is even less popular than ARES. Our overall hedge fund sentiment score for ZNH is 23. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds dodged a bullet by taking a bearish stance towards ZNH. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th but managed to beat the market again by 3.3 percentage points. Unfortunately ZNH wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); ZNH investors were disappointed as the stock returned -8.6% since the end of the first quarter (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.

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