It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month 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' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like The Habit Restaurants, Inc. (NASDAQ:HABT).
The Habit Restaurants, Inc. (NASDAQ:HABT) shareholders have witnessed an increase in hedge fund sentiment recently. HABT was in 13 hedge funds' portfolios at the end of the third quarter of 2019. There were 12 hedge funds in our database with HABT holdings at the end of the previous quarter. Our calculations also showed that HABT 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.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma Advisors[/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 gander at the recent hedge fund action encompassing The Habit Restaurants, Inc. (NASDAQ:HABT).
How are hedge funds trading The Habit Restaurants, Inc. (NASDAQ:HABT)?
Heading into the fourth quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in HABT a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Greenhouse Funds, managed by Joe Milano, holds the most valuable position in The Habit Restaurants, Inc. (NASDAQ:HABT). Greenhouse Funds has a $15 million position in the stock, comprising 3% of its 13F portfolio. The second largest stake is Renaissance Technologies, with a $14.3 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that are bullish comprise Paul Marshall and Ian Wace's Marshall Wace, John Overdeck and David Siegel's Two Sigma Advisors and Andrew Bellas's General Equity Partners. In terms of the portfolio weights assigned to each position Greenhouse Funds allocated the biggest weight to The Habit Restaurants, Inc. (NASDAQ:HABT), around 3.04% of its 13F portfolio. General Equity Partners is also relatively very bullish on the stock, setting aside 1.16 percent of its 13F equity portfolio to HABT.
Now, specific money managers were leading the bulls' herd. General Equity Partners, managed by Andrew Bellas, established the most valuable position in The Habit Restaurants, Inc. (NASDAQ:HABT). General Equity Partners had $1.5 million invested in the company at the end of the quarter. Cliff Asness's AQR Capital Management also initiated a $0.2 million position during the quarter. The only other fund with a brand new HABT position is Jonathan Berger's Birch Grove Capital.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as The Habit Restaurants, Inc. (NASDAQ:HABT) but similarly valued. These stocks are CIM Commercial Trust Corporation (NASDAQ:CMCT), Weyco Group, Inc. (NASDAQ:WEYS), Commercial Vehicle Group, Inc. (NASDAQ:CVGI), and Telenav Inc (NASDAQ:TNAV). This group of stocks' market caps are closest to HABT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CMCT,2,579,1 WEYS,3,9345,0 CVGI,11,46531,-2 TNAV,12,52973,0 Average,7,27357,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $27 million. That figure was $39 million in HABT's case. Telenav Inc (NASDAQ:TNAV) is the most popular stock in this table. On the other hand CIM Commercial Trust Corporation (NASDAQ:CMCT) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks The Habit Restaurants, Inc. (NASDAQ:HABT) is more popular among hedge funds. 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. Hedge funds were also right about betting on HABT as the stock returned 21.7% during the first two months of Q4 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.