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Hedge Fund Favorites vs. The Stars Group Inc. (TSG) In 2019

Debasis Saha

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in The Stars Group Inc. (NASDAQ:TSG).

Is The Stars Group Inc. (NASDAQ:TSG) an exceptional stock to buy now? The best stock pickers are selling. The number of long hedge fund bets retreated by 4 recently. Our calculations also showed that TSG 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).

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_30493" align="alignnone" width="600"] Jeffrey Ubben of ValueAct Capital[/caption]

Jeff Ubben VALUEACT CAPITAL

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. Now let's go over the latest hedge fund action surrounding The Stars Group Inc. (NASDAQ:TSG).

How are hedge funds trading The Stars Group Inc. (NASDAQ:TSG)?

At Q3's end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. On the other hand, there were a total of 52 hedge funds with a bullish position in TSG a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Is TSG A Good Stock To Buy?

More specifically, ValueAct Capital was the largest shareholder of The Stars Group Inc. (NASDAQ:TSG), with a stake worth $204.2 million reported as of the end of September. Trailing ValueAct Capital was Tiger Legatus Capital, which amassed a stake valued at $97.3 million. Odey Asset Management Group, Harbor Spring Capital, and HG Vora Capital Management 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 Springowl Associates allocated the biggest weight to The Stars Group Inc. (NASDAQ:TSG), around 52.17% of its 13F portfolio. Tiger Legatus Capital is also relatively very bullish on the stock, earmarking 42.06 percent of its 13F equity portfolio to TSG.

Since The Stars Group Inc. (NASDAQ:TSG) has faced a decline in interest from hedge fund managers, it's safe to say that there was a specific group of fund managers who sold off their positions entirely heading into Q4. At the top of the heap, David Kowitz and Sheldon Kasowitz's Indus Capital said goodbye to the biggest investment of all the hedgies tracked by Insider Monkey, totaling an estimated $30 million in stock, and Richard Gerson and Navroz D. Udwadia's Falcon Edge Capital was right behind this move, as the fund dumped about $19.1 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q4.

Let's also examine hedge fund activity in other stocks similar to The Stars Group Inc. (NASDAQ:TSG). We will take a look at Ritchie Bros. Auctioneers (NYSE:RBA), CIT Group Inc. (NYSE:CIT), Six Flags Entertainment Corp (NYSE:SIX), and LG Display Co Ltd. (NYSE:LPL). This group of stocks' market caps are similar to TSG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RBA,13,185553,1 CIT,27,810397,2 SIX,37,639016,7 LPL,3,9362,0 Average,20,411082,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $411 million. That figure was $717 million in TSG's case. Six Flags Entertainment Corp (NYSE:SIX) is the most popular stock in this table. On the other hand LG Display Co Ltd. (NYSE:LPL) is the least popular one with only 3 bullish hedge fund positions. The Stars Group Inc. (NASDAQ:TSG) is not the most popular stock in this group but hedge fund interest is still above average. 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 TSG as the stock returned 53.3% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. 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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