Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Fanhua Inc. (NASDAQ:FANH) changed recently.
Fanhua Inc. (NASDAQ:FANH) shareholders have witnessed a decrease in hedge fund interest recently. FANH was in 8 hedge funds' portfolios at the end of the third quarter of 2019. There were 9 hedge funds in our database with FANH positions at the end of the previous quarter. Our calculations also showed that FANH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_224708" align="aligncenter" width="464"] New York Stock Exchange[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the latest hedge fund action encompassing Fanhua Inc. (NASDAQ:FANH).
What does smart money think about Fanhua Inc. (NASDAQ:FANH)?
At Q3's end, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. On the other hand, there were a total of 4 hedge funds with a bullish position in FANH a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
The largest stake in Fanhua Inc. (NASDAQ:FANH) was held by D E Shaw, which reported holding $6.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $2.8 million position. Other investors bullish on the company included AQR Capital Management, Sensato Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Sensato Capital Management allocated the biggest weight to Fanhua Inc. (NASDAQ:FANH), around 0.68% of its 13F portfolio. PEAK6 Capital Management is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to FANH.
Because Fanhua Inc. (NASDAQ:FANH) has witnessed declining sentiment from the smart money, we can see that there exists a select few hedge funds that slashed their positions entirely last quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the largest position of the 750 funds followed by Insider Monkey, comprising an estimated $8.9 million in call options, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund sold off about $0.5 million worth. These transactions are important to note, as total hedge fund interest dropped by 1 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Fanhua Inc. (NASDAQ:FANH) but similarly valued. We will take a look at Enerplus Corp (NYSE:ERF), SPS Commerce, Inc. (NASDAQ:SPSC), Progress Software Corporation (NASDAQ:PRGS), and Patterson Companies, Inc. (NASDAQ:PDCO). This group of stocks' market caps resemble FANH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ERF,15,155867,3 SPSC,17,142840,-1 PRGS,21,206788,-3 PDCO,22,159641,-1 Average,18.75,166284,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $17 million in FANH's case. Patterson Companies, Inc. (NASDAQ:PDCO) is the most popular stock in this table. On the other hand Enerplus Corp (NYSE:ERF) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Fanhua Inc. (NASDAQ:FANH) is even less popular than ERF. Hedge funds dodged a bullet by taking a bearish stance towards FANH. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately FANH wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); FANH investors were disappointed as the stock returned 2.1% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.