Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves. In this article, we look at what those funds think of Baidu, Inc. (NASDAQ:BIDU) based on that data.
Baidu, Inc. (NASDAQ:BIDU) shareholders have witnessed a decrease in hedge fund interest of late. BIDU was in 43 hedge funds' portfolios at the end of September. There were 44 hedge funds in our database with BIDU positions at the end of the previous quarter. Our calculations also showed that BIDU isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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_25717" align="aligncenter" width="440"] Steven Cohen of Point72 Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to take a look at the latest hedge fund action encompassing Baidu, Inc. (NASDAQ:BIDU).
How have hedgies been trading Baidu, Inc. (NASDAQ:BIDU)?
Heading into the fourth quarter of 2019, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in BIDU over the last 17 quarters. With hedgies' capital changing hands, there exists a few key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, First Pacific Advisors was the largest shareholder of Baidu, Inc. (NASDAQ:BIDU), with a stake worth $245.7 million reported as of the end of September. Trailing First Pacific Advisors was Ariel Investments, which amassed a stake valued at $193.4 million. Fisher Asset Management, D E Shaw, and Two Sigma Advisors 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 Punch Card Capital allocated the biggest weight to Baidu, Inc. (NASDAQ:BIDU), around 16.08% of its 13F portfolio. Tiger Pacific Capital is also relatively very bullish on the stock, designating 7 percent of its 13F equity portfolio to BIDU.
Since Baidu, Inc. (NASDAQ:BIDU) has experienced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of money managers who sold off their full holdings heading into Q4. It's worth mentioning that Karthik Sarma's SRS Investment Management dumped the largest stake of the 750 funds tracked by Insider Monkey, worth close to $48 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace, also cut its stock, about $18.9 million worth. These moves are important to note, as total hedge fund interest fell by 1 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks similar to Baidu, Inc. (NASDAQ:BIDU). These stocks are The Allstate Corporation (NYSE:ALL), V.F. Corporation (NYSE:VFC), Dow Inc. (NYSE:DOW), and Valero Energy Corporation (NYSE:VLO). This group of stocks' market valuations resemble BIDU's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALL,44,1900363,7 VFC,33,920216,1 DOW,32,285661,-1 VLO,35,530355,0 Average,36,909149,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $909 million. That figure was $1745 million in BIDU's case. The Allstate Corporation (NYSE:ALL) is the most popular stock in this table. On the other hand Dow Inc. (NYSE:DOW) is the least popular one with only 32 bullish hedge fund positions. Baidu, Inc. (NASDAQ:BIDU) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 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 -18.8% in 2019 (through December 23rd) 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 this year. 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.