It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 24.4% during the first 9 months of 2019 and outperformed the S&P 500 ETF by 4 percentage points. We are done processing the latest 13f filings and in this article we will study how hedge fund sentiment towards China Yuchai International Limited (NYSE:CYD) changed during the first quarter.
Hedge fund interest in China Yuchai International Limited (NYSE:CYD) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Cohu, Inc. (NASDAQ:COHU), Just Energy Group, Inc. (NYSE:JE), and Argan, Inc. (NYSE:AGX) to gather more data points. Our calculations also showed that CYD isn't among the 30 most popular stocks among hedge funds (see the video below). 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 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 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 our short portfolio.
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. We're going to view the fresh hedge fund action regarding China Yuchai International Limited (NYSE:CYD).
How are hedge funds trading China Yuchai International Limited (NYSE:CYD)?
Heading into the third quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2019. By comparison, 8 hedge funds held shares or bullish call options in CYD 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, Shah Capital Management was the largest shareholder of China Yuchai International Limited (NYSE:CYD), with a stake worth $51.9 million reported as of the end of March. Trailing Shah Capital Management was Renaissance Technologies, which amassed a stake valued at $6.4 million. Sensato Capital Management, Arrowstreet Capital, and Chou Associates Management were also very fond of the stock, giving the stock large weights in their portfolios.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: D E Shaw. 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 Springbok Capital).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as China Yuchai International Limited (NYSE:CYD) but similarly valued. We will take a look at Cohu, Inc. (NASDAQ:COHU), Just Energy Group, Inc. (NYSE:JE), Argan, Inc. (NYSE:AGX), and Resolute Forest Products Inc (NYSE:RFP). This group of stocks' market valuations resemble CYD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COHU,10,50030,-3 JE,13,45371,3 AGX,10,90573,-2 RFP,17,286497,-6 Average,12.5,118118,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $68 million in CYD's case. Resolute Forest Products Inc (NYSE:RFP) is the most popular stock in this table. On the other hand Cohu, Inc. (NASDAQ:COHU) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks China Yuchai International Limited (NYSE:CYD) is even less popular than COHU. Hedge funds dodged a bullet by taking a bearish stance towards CYD. 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 CYD wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CYD investors were disappointed as the stock returned -8.6% 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.