Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Is Flex Ltd. (NASDAQ:FLEX) undervalued? Money managers are reducing their bets on the stock. The number of bullish hedge fund bets shrunk by 2 in recent months. Our calculations also showed that FLEX isn't among the 30 most popular stocks among hedge funds. FLEX was in 24 hedge funds' portfolios at the end of December. There were 26 hedge funds in our database with FLEX positions at the end of the previous quarter.
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.
Let's take a gander at the recent hedge fund action encompassing Flex Ltd. (NASDAQ:FLEX).
How are hedge funds trading Flex Ltd. (NASDAQ:FLEX)?
At Q4's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards FLEX over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Ken Griffin's Citadel Investment Group has the biggest position in Flex Ltd. (NASDAQ:FLEX), worth close to $143.6 million, accounting for 0.1% of its total 13F portfolio. On Citadel Investment Group's heels is Glenview Capital, led by Larry Robbins, holding a $119.2 million position; 1.2% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that hold long positions comprise D. E. Shaw's D E Shaw, Richard S. Pzena's Pzena Investment Management and Anand Parekh's Alyeska Investment Group.
Judging by the fact that Flex Ltd. (NASDAQ:FLEX) has faced a decline in interest from the smart money, logic holds that there exists a select few hedgies that slashed their full holdings last quarter. At the top of the heap, Brian Ashford-Russell and Tim Woolley's Polar Capital said goodbye to the biggest position of all the hedgies monitored by Insider Monkey, comprising an estimated $70.4 million in stock. Leon Shaulov's fund, Maplelane Capital, also said goodbye to its stock, about $7.9 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Flex Ltd. (NASDAQ:FLEX). We will take a look at Choice Hotels International, Inc. (NYSE:CHH), Highwoods Properties Inc (NYSE:HIW), American Greetings Corporation (NYSE:AM), and Hawaiian Electric Industries, Inc. (NYSE:HE). This group of stocks' market valuations resemble FLEX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHH,19,226548,1 HIW,17,182549,3 AM,7,18668,-4 HE,13,162017,2 Average,14,147446,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $147 million. That figure was $676 million in FLEX's case. Choice Hotels International, Inc. (NYSE:CHH) is the most popular stock in this table. On the other hand American Greetings Corporation (NYSE:AM) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Flex Ltd. (NASDAQ:FLEX) 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 FLEX as the stock returned 45.9% 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.