Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Flex Ltd. (NASDAQ:FLEX) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.
Is Flex Ltd. (NASDAQ:FLEX) a bargain? The smart money is in a bearish mood. The number of bullish hedge fund bets were cut by 3 in recent months. Our calculations also showed that FLEX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). FLEX was in 31 hedge funds' portfolios at the end of September. There were 34 hedge funds in our database with FLEX positions at the end of the previous quarter.
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_26869" align="alignnone" width="600"] Larry Robbins of Glenview Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's check out the recent hedge fund action regarding Flex Ltd. (NASDAQ:FLEX).
What does smart money think about Flex Ltd. (NASDAQ:FLEX)?
At Q3's end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the second quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in FLEX a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Glenview Capital was the largest shareholder of Flex Ltd. (NASDAQ:FLEX), with a stake worth $202.4 million reported as of the end of September. Trailing Glenview Capital was Iridian Asset Management, which amassed a stake valued at $197.7 million. Lyrical Asset Management, Citadel Investment Group, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Sachem Head Capital allocated the biggest weight to Flex Ltd. (NASDAQ:FLEX), around 8.93% of its 13F portfolio. Shannon River Fund Management is also relatively very bullish on the stock, earmarking 8.17 percent of its 13F equity portfolio to FLEX.
Due to the fact that Flex Ltd. (NASDAQ:FLEX) has experienced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there were a few fund managers that elected to cut their full holdings in the third quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management sold off the biggest investment of all the hedgies watched by Insider Monkey, totaling close to $11.5 million in stock, and Jay Petschek and Steven Major's Corsair Capital Management was right behind this move, as the fund sold off about $4.4 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 3 funds in the third quarter.
Let's also examine hedge fund activity in other stocks similar to Flex Ltd. (NASDAQ:FLEX). These stocks are Leggett & Platt, Inc. (NYSE:LEG), ITT Corp (NYSE:ITT), Pegasystems Inc. (NASDAQ:PEGA), and Polaris Industries Inc. (NYSE:PII). This group of stocks' market caps resemble FLEX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LEG,10,53164,1 ITT,20,516984,-5 PEGA,23,733352,-1 PII,25,358943,1 Average,19.5,415611,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $416 million. That figure was $1478 million in FLEX's case. Polaris Industries Inc. (NYSE:PII) is the most popular stock in this table. On the other hand Leggett & Platt, Inc. (NYSE:LEG) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Flex Ltd. (NASDAQ:FLEX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on FLEX as the stock returned 67.5% so far in 2019 (through 12/23) 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.