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How Did Churchill Downs Incorporated (CHDN) Compare Against Hedge Fund Darlings in 2019?

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Hedge fund interest in Churchill Downs Incorporated (NASDAQ:CHDN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CHDN to other stocks including MAXIMUS, Inc. (NYSE:MMS), Millicom International Cellular S.A. (NASDAQ:TIGO), and Life Storage, Inc. (NYSE:LSI) to get a better sense of its popularity.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_747408" align="aligncenter" width="1613"] Paul Reeder of PAR Capital Management[/caption]

Paul Reeder PAR Capital Management

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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to take a glance at the new hedge fund action surrounding Churchill Downs Incorporated (NASDAQ:CHDN).

How have hedgies been trading Churchill Downs Incorporated (NASDAQ:CHDN)?

At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in CHDN over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

More specifically, PAR Capital Management was the largest shareholder of Churchill Downs Incorporated (NASDAQ:CHDN), with a stake worth $266.2 million reported as of the end of September. Trailing PAR Capital Management was Nitorum Capital, which amassed a stake valued at $124.8 million. Millennium Management, Citadel Investment Group, and Hudson Way Capital Management 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 Hudson Way Capital Management allocated the biggest weight to Churchill Downs Incorporated (NASDAQ:CHDN), around 18.08% of its 13F portfolio. 1060 Capital Management is also relatively very bullish on the stock, earmarking 16.76 percent of its 13F equity portfolio to CHDN.

Seeing as Churchill Downs Incorporated (NASDAQ:CHDN) has faced falling interest from hedge fund managers, we can see that there exists a select few money managers that slashed their positions entirely by the end of the third quarter. At the top of the heap, Sara Nainzadeh's Centenus Global Management dumped the biggest investment of the 750 funds followed by Insider Monkey, valued at an estimated $2.3 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund said goodbye to about $0.3 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Churchill Downs Incorporated (NASDAQ:CHDN) but similarly valued. We will take a look at MAXIMUS, Inc. (NYSE:MMS), Millicom International Cellular S.A. (NASDAQ:TIGO), Life Storage, Inc. (NYSE:LSI), and Kirby Corporation (NYSE:KEX). All of these stocks' market caps match CHDN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MMS,23,223777,1 TIGO,6,96480,1 LSI,15,226876,-5 KEX,20,663418,-3 Average,16,302638,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $303 million. That figure was $721 million in CHDN's case. MAXIMUS, Inc. (NYSE:MMS) is the most popular stock in this table. On the other hand Millicom International Cellular S.A. (NASDAQ:TIGO) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Churchill Downs Incorporated (NASDAQ:CHDN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CHDN as the stock returned 69.5% in 2019 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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