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Did Hedge Funds Drop The Ball On Churchill Downs Incorporated (CHDN) ?

Abigail Fisher

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.

Churchill Downs Incorporated (NASDAQ:CHDN) was in 25 hedge funds' portfolios at the end of the second quarter of 2019. CHDN shareholders have witnessed a decrease in support from the world's most elite money managers recently. There were 29 hedge funds in our database with CHDN positions at the end of the previous quarter. Our calculations also showed that CHDN isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

CHDN_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, 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. We're going to go over the latest hedge fund action surrounding Churchill Downs Incorporated (NASDAQ:CHDN).

What does smart money think about Churchill Downs Incorporated (NASDAQ:CHDN)?

At Q2's end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CHDN over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Paul Reeder PAR Capital Management

Among these funds, PAR Capital Management held the most valuable stake in Churchill Downs Incorporated (NASDAQ:CHDN), which was worth $248.1 million at the end of the second quarter. On the second spot was Nitorum Capital which amassed $86.9 million worth of shares. Moreover, Citadel Investment Group, Millennium Management, and GAMCO Investors were also bullish on Churchill Downs Incorporated (NASDAQ:CHDN), allocating a large percentage of their portfolios to this stock.

Seeing as Churchill Downs Incorporated (NASDAQ:CHDN) has witnessed bearish sentiment from the smart money, it's safe to say that there exists a select few funds who were dropping their entire stakes in the second quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the biggest position of the 750 funds tracked by Insider Monkey, totaling about $10.6 million in stock. Ward Davis and Brian Agnew's fund, Caerus Global Investors, also sold off its stock, about $10.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 4 funds in the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Churchill Downs Incorporated (NASDAQ:CHDN) but similarly valued. We will take a look at Essent Group Ltd (NYSE:ESNT), First Industrial Realty Trust, Inc. (NYSE:FR), Macerich Company (NYSE:MAC), and Nuance Communications Inc. (NASDAQ:NUAN). This group of stocks' market values match CHDN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ESNT,30,325693,3 FR,18,290383,7 MAC,21,288149,-1 NUAN,28,529243,0 Average,24.25,358367,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $358 million. That figure was $681 million in CHDN's case. Essent Group Ltd (NYSE:ESNT) is the most popular stock in this table. On the other hand First Industrial Realty Trust, Inc. (NYSE:FR) is the least popular one with only 18 bullish hedge fund positions. Churchill Downs Incorporated (NASDAQ:CHDN) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on CHDN as the stock returned 7.3% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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