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Did Hedge Funds Drop The Ball On Chegg Inc (CHGG) ?

Asma UL Husna

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Chegg Inc (NYSE:CHGG).

Chegg Inc (NYSE:CHGG) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds' portfolios at the end of the fourth quarter of 2018. At the end of this article we will also compare CHGG to other stocks including Apple Hospitality REIT Inc (NYSE:APLE), TCF Financial Corporation (NYSE:TCF), and RBC Bearings Incorporated (NASDAQ:ROLL) to get a better sense of its popularity.

Why do we pay any attention at all to hedge fund sentiment? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

Let's take a look at the recent hedge fund action encompassing Chegg Inc (NYSE:CHGG).

How have hedgies been trading Chegg Inc (NYSE:CHGG)?

Heading into the first quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in CHGG a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CHGG_apr2019

More specifically, Sylebra Capital Management was the largest shareholder of Chegg Inc (NYSE:CHGG), with a stake worth $197.4 million reported as of the end of September. Trailing Sylebra Capital Management was Greenhouse Funds, which amassed a stake valued at $36.5 million. Columbus Circle Investors, Hitchwood Capital Management, and Polar Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Chegg Inc (NYSE:CHGG) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few funds that decided to sell off their positions entirely in the third quarter. It's worth mentioning that Matthew Hulsizer's PEAK6 Capital Management cut the biggest stake of the "upper crust" of funds watched by Insider Monkey, comprising close to $3 million in stock. John Osterweis's fund, Osterweis Capital Management, also dropped its stock, about $2.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now take a look at hedge fund activity in other stocks similar to Chegg Inc (NYSE:CHGG). We will take a look at Apple Hospitality REIT Inc (NYSE:APLE), TCF Financial Corporation (NYSE:TCF), RBC Bearings Incorporated (NASDAQ:ROLL), and Lumentum Holdings Inc (NASDAQ:LITE). This group of stocks' market values match CHGG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APLE,11,91271,1 TCF,23,264796,-1 ROLL,6,48158,-1 LITE,31,214753,-2 Average,17.75,154745,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $155 million. That figure was $381 million in CHGG's case. Lumentum Holdings Inc (NASDAQ:LITE) is the most popular stock in this table. On the other hand RBC Bearings Incorporated (NASDAQ:ROLL) is the least popular one with only 6 bullish hedge fund positions. Chegg Inc (NYSE:CHGG) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on CHGG as the stock returned 34.2% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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