Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
GTT Communications Inc (NYSE:GTT) investors should pay attention to a decrease in hedge fund interest lately. GTT was in 13 hedge funds' portfolios at the end of the third quarter of 2019. There were 18 hedge funds in our database with GTT positions at the end of the previous quarter. Our calculations also showed that GTT 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_315167" align="alignnone" width="600"] Dan Loeb of Third Point[/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. We're going to take a peek at the fresh hedge fund action encompassing GTT Communications Inc (NYSE:GTT).
How have hedgies been trading GTT Communications Inc (NYSE:GTT)?
Heading into the fourth quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in GTT a year ago. With hedge funds' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
The largest stake in GTT Communications Inc (NYSE:GTT) was held by Spruce House Investment Management, which reported holding $131.4 million worth of stock at the end of September. It was followed by Third Point with a $28.9 million position. Other investors bullish on the company included MFN Partners, GMT Capital, and Spitfire Capital. In terms of the portfolio weights assigned to each position Spruce House Investment Management allocated the biggest weight to GTT Communications Inc (NYSE:GTT), around 4.75% of its 13F portfolio. Spitfire Capital is also relatively very bullish on the stock, dishing out 4.43 percent of its 13F equity portfolio to GTT.
Since GTT Communications Inc (NYSE:GTT) has witnessed bearish sentiment from hedge fund managers, it's easy to see that there is a sect of money managers that elected to cut their full holdings in the third quarter. Interestingly, Edward Goodnow's Goodnow Investment Group cut the largest position of all the hedgies followed by Insider Monkey, totaling close to $13 million in stock, and Jeffrey Bronchick's Cove Street Capital was right behind this move, as the fund said goodbye to about $10 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as GTT Communications Inc (NYSE:GTT) but similarly valued. These stocks are A10 Networks Inc (NYSE:ATEN), Gogo Inc (NASDAQ:GOGO), China Yuchai International Limited (NYSE:CYD), and Ennis, Inc. (NYSE:EBF). This group of stocks' market valuations are similar to GTT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATEN,17,105496,2 GOGO,17,104257,2 CYD,9,55431,0 EBF,11,68783,-1 Average,13.5,83492,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $83 million. That figure was $183 million in GTT's case. A10 Networks Inc (NYSE:ATEN) is the most popular stock in this table. On the other hand China Yuchai International Limited (NYSE:CYD) is the least popular one with only 9 bullish hedge fund positions. GTT Communications Inc (NYSE:GTT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately GTT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GTT investors were disappointed as the stock returned -5.8% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.