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Hedge Fund Darlings vs. CenturyLink, Inc. (CTL) In 2019

Nina Todic

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 CenturyLink, Inc. (NYSE:CTL).

Is CenturyLink, Inc. (NYSE:CTL) a healthy stock for your portfolio? Prominent investors are in an optimistic mood. The number of bullish hedge fund bets rose by 1 recently. Our calculations also showed that CTL 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). CTL was in 28 hedge funds' portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with CTL 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' 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_340075" align="aligncenter" width="450"] Mason Hawkins of Southeastern Asset Management[/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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Now we're going to take a peek at the latest hedge fund action encompassing CenturyLink, Inc. (NYSE:CTL).

How have hedgies been trading CenturyLink, Inc. (NYSE:CTL)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CTL over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Southeastern Asset Management, managed by Mason Hawkins, holds the biggest position in CenturyLink, Inc. (NYSE:CTL). Southeastern Asset Management has a $919.3 million position in the stock, comprising 16% of its 13F portfolio. The second largest stake is held by Ken Griffin of Citadel Investment Group, with a $34.7 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other professional money managers that are bullish consist of Prem Watsa's Fairfax Financial Holdings, Israel Englander's Millennium Management and Phill Gross and Robert Atchinson's Adage Capital Management. In terms of the portfolio weights assigned to each position Southeastern Asset Management allocated the biggest weight to CenturyLink, Inc. (NYSE:CTL), around 16.03% of its 13F portfolio. Knoll Capital Management is also relatively very bullish on the stock, setting aside 2.51 percent of its 13F equity portfolio to CTL.

As aggregate interest increased, key money managers were breaking ground themselves. Renaissance Technologies created the most valuable position in CenturyLink, Inc. (NYSE:CTL). Renaissance Technologies had $12.2 million invested in the company at the end of the quarter. Michael Gelband's ExodusPoint Capital also made a $3.2 million investment in the stock during the quarter. The other funds with brand new CTL positions are Fred Knoll's Knoll Capital Management, Paul Tudor Jones's Tudor Investment Corp, and Renee Yao's Neo Ivy Capital.

Let's now review hedge fund activity in other stocks similar to CenturyLink, Inc. (NYSE:CTL). These stocks are DexCom, Inc. (NASDAQ:DXCM), Old Dominion Freight Line, Inc. (NASDAQ:ODFL), NVR, Inc. (NYSE:NVR), and Wabtec Corporation (NYSE:WAB). This group of stocks' market values are closest to CTL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DXCM,33,558258,3 ODFL,22,140882,-1 NVR,36,1162559,9 WAB,32,1646949,5 Average,30.75,877162,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $877 million. That figure was $1098 million in CTL's case. NVR, Inc. (NYSE:NVR) is the most popular stock in this table. On the other hand Old Dominion Freight Line, Inc. (NASDAQ:ODFL) is the least popular one with only 22 bullish hedge fund positions. CenturyLink, Inc. (NYSE:CTL) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CTL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CTL investors were disappointed as the stock returned -5.2% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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