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Did Hedge Funds Drop The Ball On Take-Two Interactive Software, Inc. (TTWO) ?

Nina Todic

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 12.1% in 2019 (through May 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 18.7% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Take-Two Interactive Software, Inc. (NASDAQ:TTWO).

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) was in 50 hedge funds' portfolios at the end of the first quarter of 2019. TTWO has seen a decrease in enthusiasm from smart money lately. There were 58 hedge funds in our database with TTWO holdings at the end of the previous quarter. Our calculations also showed that ttwo isn't among the 30 most popular stocks among hedge funds.

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.

Ricky Sandler

Let's analyze the key hedge fund action surrounding Take-Two Interactive Software, Inc. (NASDAQ:TTWO).

What have hedge funds been doing with Take-Two Interactive Software, Inc. (NASDAQ:TTWO)?

Heading into the second quarter of 2019, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the fourth quarter of 2018. On the other hand, there were a total of 48 hedge funds with a bullish position in TTWO 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.

No of Hedge Funds with TTWO Positions

More specifically, Citadel Investment Group was the largest shareholder of Take-Two Interactive Software, Inc. (NASDAQ:TTWO), with a stake worth $222.9 million reported as of the end of March. Trailing Citadel Investment Group was Eminence Capital, which amassed a stake valued at $171.2 million. Valinor Management, Palestra Capital Management, and Holocene Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

Because Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has witnessed falling interest from the smart money, we can see that there was a specific group of money managers that elected to cut their entire stakes in the third quarter. At the top of the heap, Robert Bishop's Impala Asset Management sold off the largest position of the 700 funds watched by Insider Monkey, comprising about $106.3 million in stock. Steve Cohen's fund, Point72 Asset Management, also said goodbye to its stock, about $93 million worth. These moves are important to note, as total hedge fund interest was cut by 8 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to Take-Two Interactive Software, Inc. (NASDAQ:TTWO). These stocks are China Southern Airlines Company Limited (NYSE:ZNH), NiSource Inc. (NYSE:NI), Cboe Global Markets, Inc. (NASDAQ:CBOE), and Cenovus Energy Inc (NYSE:CVE). This group of stocks' market valuations are similar to TTWO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZNH,3,18911,-1 NI,18,691077,2 CBOE,22,881706,-2 CVE,23,454911,3 Average,16.5,511651,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $512 million. That figure was $1425 million in TTWO's case. Cenovus Energy Inc (NYSE:CVE) is the most popular stock in this table. On the other hand China Southern Airlines Company Limited (NYSE:ZNH) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on TTWO as the stock returned 13.4% during the same period 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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