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Hedge Fund Darlings vs. Extended Stay America Inc (STAY) In 2019

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Extended Stay America Inc (NASDAQ:STAY) has seen a decrease in activity from the world's largest hedge funds in recent months. STAY was in 25 hedge funds' portfolios at the end of September. There were 28 hedge funds in our database with STAY holdings at the end of the previous quarter. Our calculations also showed that STAY 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).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_30600" align="aligncenter" width="600"] Bruce Kovner of Caxton Associates LP[/caption]

Bruce Kovner, Caxton Associates LP

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 let's analyze the recent hedge fund action regarding Extended Stay America Inc (NASDAQ:STAY).

How have hedgies been trading Extended Stay America Inc (NASDAQ:STAY)?

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the second quarter of 2019. On the other hand, there were a total of 30 hedge funds with a bullish position in STAY a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Long Pond Capital held the most valuable stake in Extended Stay America Inc (NASDAQ:STAY), which was worth $129.7 million at the end of the third quarter. On the second spot was Senator Investment Group which amassed $75.8 million worth of shares. Arrowstreet Capital, Cardinal Capital, and Citadel Investment Group 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 Hawk Ridge Management allocated the biggest weight to Extended Stay America Inc (NASDAQ:STAY), around 5.34% of its 13F portfolio. Long Pond Capital is also relatively very bullish on the stock, dishing out 3.38 percent of its 13F equity portfolio to STAY.

Since Extended Stay America Inc (NASDAQ:STAY) has faced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of hedge funds who were dropping their positions entirely last quarter. Interestingly, Jeffrey Tannenbaum's Fir Tree dumped the largest investment of all the hedgies watched by Insider Monkey, worth close to $49 million in stock. Jeffrey Furber's fund, AEW Capital Management, also sold off its stock, about $43.1 million worth. These transactions are important to note, as total hedge fund interest was cut by 3 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Extended Stay America Inc (NASDAQ:STAY) but similarly valued. These stocks are Chesapeake Energy Corporation (NYSE:CHK), Acadia Healthcare Company Inc (NASDAQ:ACHC), Texas Capital Bancshares Inc (NASDAQ:TCBI), and Urban Outfitters, Inc. (NASDAQ:URBN). This group of stocks' market valuations resemble STAY's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHK,17,65596,-1 ACHC,20,574852,3 TCBI,20,249477,1 URBN,33,292388,12 Average,22.5,295578,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $507 million in STAY's case. Urban Outfitters, Inc. (NASDAQ:URBN) is the most popular stock in this table. On the other hand Chesapeake Energy Corporation (NYSE:CHK) is the least popular one with only 17 bullish hedge fund positions. Extended Stay America Inc (NASDAQ:STAY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 STAY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on STAY were disappointed as the stock returned 1.4% 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 many of these stocks already outperformed the market so far this year. 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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