Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Baidu, Inc. (NASDAQ:BIDU).
Baidu, Inc. (NASDAQ:BIDU) investors should be aware of a decrease in activity from the world's largest hedge funds of late. Overall hedge fund sentiment towards the stock is at its all time low. Our calculations also showed that BIDU isn't among the 30 most popular stocks among hedge funds (watch the video below).
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 some fund managers who are betting on Dow reaching 40000 in a year, 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 take a gander at the new hedge fund action regarding Baidu, Inc. (NASDAQ:BIDU).
What does smart money think about Baidu, Inc. (NASDAQ:BIDU)?
At Q2's end, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the first quarter of 2019. By comparison, 67 hedge funds held shares or bullish call options in BIDU a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, First Pacific Advisors LLC was the largest shareholder of Baidu, Inc. (NASDAQ:BIDU), with a stake worth $280.6 million reported as of the end of March. Trailing First Pacific Advisors LLC was Fisher Asset Management, which amassed a stake valued at $202 million. Ariel Investments, D E Shaw, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
Since Baidu, Inc. (NASDAQ:BIDU) has experienced bearish sentiment from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds who sold off their entire stakes in the second quarter. Interestingly, Jim Simons's Renaissance Technologies said goodbye to the biggest investment of all the hedgies followed by Insider Monkey, totaling an estimated $111.6 million in stock. Noam Gottesman's fund, GLG Partners, also sold off its stock, about $61.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 9 funds in the second quarter.
Let's also examine hedge fund activity in other stocks similar to Baidu, Inc. (NASDAQ:BIDU). We will take a look at Baxter International Inc. (NYSE:BAX), FedEx Corporation (NYSE:FDX), BCE Inc. (NYSE:BCE), and Orange S.A. (NYSE:ORAN). All of these stocks' market caps match BIDU's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BAX,34,2818359,4 FDX,40,1808917,-1 BCE,14,364792,-2 ORAN,2,1488,0 Average,22.5,1248389,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $1248 million. That figure was $1823 million in BIDU's case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Orange S.A. (NYSE:ORAN) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Baidu, Inc. (NASDAQ:BIDU) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately BIDU wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BIDU were disappointed as the stock returned -12.4% 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 in Q3. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.