Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like FirstService Corporation (NASDAQ:FSV).
Is FirstService Corporation (NASDAQ:FSV) a buy, sell, or hold? Prominent investors are in a pessimistic mood. The number of bullish hedge fund bets were cut by 1 in recent months. Our calculations also showed that FSV isn't among the 30 most popular stocks among hedge funds (view the video below). FSV was in 10 hedge funds' portfolios at the end of June. There were 11 hedge funds in our database with FSV positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let's review the key hedge fund action encompassing FirstService Corporation (NASDAQ:FSV).
How are hedge funds trading FirstService Corporation (NASDAQ:FSV)?
Heading into the third quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FSV over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the number one position in FirstService Corporation (NASDAQ:FSV), worth close to $90.4 million, comprising 0.1% of its total 13F portfolio. Coming in second is Royce & Associates, managed by Chuck Royce, which holds a $22.2 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Remaining peers that hold long positions include Leon Lowenstein's Lionstone Capital Management, Israel Englander's Millennium Management and Brad Dunkley and Blair Levinsky's Waratah Capital Advisors.
Seeing as FirstService Corporation (NASDAQ:FSV) has witnessed declining sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of hedgies who were dropping their entire stakes last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the largest position of all the hedgies monitored by Insider Monkey, valued at close to $13 million in stock. Cliff Asness's fund, AQR Capital Management, also dropped its stock, about $2.2 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as FirstService Corporation (NASDAQ:FSV) but similarly valued. We will take a look at Embraer SA (NYSE:ERJ), Tandem Diabetes Care Inc (NASDAQ:TNDM), Univar Solutions Inc. (NYSE:UNVR), and Outfront Media Inc (NYSE:OUT). This group of stocks' market values are closest to FSV's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ERJ,7,50753,-1 TNDM,33,485692,0 UNVR,31,1301531,-11 OUT,22,343646,-3 Average,23.25,545406,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $545 million. That figure was $141 million in FSV's case. Tandem Diabetes Care Inc (NASDAQ:TNDM) is the most popular stock in this table. On the other hand Embraer SA (NYSE:ERJ) is the least popular one with only 7 bullish hedge fund positions. FirstService Corporation (NASDAQ:FSV) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on FSV as the stock returned 7.1% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.