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Did Hedge Funds Drop The Ball On FGL Holdings (FG) ?

Asma UL Husna

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

FGL Holdings (NYSE:FG) was in 29 hedge funds' portfolios at the end of December. FG has experienced an increase in support from the world's most elite money managers of late. There were 28 hedge funds in our database with FG holdings at the end of the previous quarter. Our calculations also showed that FG isn't among the 30 most popular stocks among hedge funds.

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 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 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.

[caption id="attachment_324853" align="aligncenter" width="450"] Joshua Friedman of Canyon Capital[/caption]

Josh Friedman Canyon Capital

We're going to review the fresh hedge fund action regarding FGL Holdings (NYSE:FG).

How are hedge funds trading FGL Holdings (NYSE:FG)?

At Q4's end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in FG a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

FG_apr2019

The largest stake in FGL Holdings (NYSE:FG) was held by Kingstown Capital Management, which reported holding $44.5 million worth of stock at the end of December. It was followed by Mason Capital Management with a $39.1 million position. Other investors bullish on the company included Canyon Capital Advisors, Ulysses Management, and StackLine Partners.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Ulysses Management, managed by Joshua Nash, assembled the biggest position in FGL Holdings (NYSE:FG). Ulysses Management had $16.5 million invested in the company at the end of the quarter. Brian Gootzeit and Andrew Frank's StackLine Partners also made a $15.7 million investment in the stock during the quarter. The other funds with brand new FG positions are George McCabe's Portolan Capital Management, Farhad Nanji and Michael DeMichele's MFN Partners, and Richard Rubin's Hawkeye Capital.

Let's now review hedge fund activity in other stocks similar to FGL Holdings (NYSE:FG). We will take a look at Rapid7 Inc (NASDAQ:RPD), Cars.com Inc. (NYSE:CARS), Kaiser Aluminum Corp. (NASDAQ:KALU), and Chesapeake Lodging Trust (NYSE:CHSP). This group of stocks' market caps are closest to FG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RPD,24,255954,7 CARS,18,306774,-12 KALU,14,122108,-3 CHSP,12,16753,3 Average,17,175397,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $208 million in FG's case. Rapid7 Inc (NASDAQ:RPD) is the most popular stock in this table. On the other hand Chesapeake Lodging Trust (NYSE:CHSP) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks FGL Holdings (NYSE:FG) is more popular among hedge funds. 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 FG as the stock returned 27.8% 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.

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

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