"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards GDS Holdings Limited (NASDAQ:GDS) and see how it was affected.
Is GDS Holdings Limited (NASDAQ:GDS) a sound stock to buy now? Prominent investors are getting more optimistic. The number of bullish hedge fund positions moved up by 2 recently. Our calculations also showed that GDS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). GDS was in 30 hedge funds' portfolios at the end of the third quarter of 2019. There were 28 hedge funds in our database with GDS holdings at the end of the previous quarter. 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' 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.
[caption id="attachment_26088" align="aligncenter" width="600"] Chase Coleman of Tiger Global[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the recent hedge fund action encompassing GDS Holdings Limited (NASDAQ:GDS).
How are hedge funds trading GDS Holdings Limited (NASDAQ:GDS)?
At Q3's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the previous quarter. By comparison, 26 hedge funds held shares or bullish call options in GDS a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Joel Ramin's 12 West Capital Management has the most valuable position in GDS Holdings Limited (NASDAQ:GDS), worth close to $438.6 million, corresponding to 28.2% of its total 13F portfolio. On 12 West Capital Management's heels is Chase Coleman of Tiger Global Management, with a $229.7 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism include Ted Kang's Kylin Management, Scott Ferguson's Sachem Head Capital and David E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position 12 West Capital Management allocated the biggest weight to GDS Holdings Limited (NASDAQ:GDS), around 28.23% of its portfolio. Kylin Management is also relatively very bullish on the stock, setting aside 17.43 percent of its 13F equity portfolio to GDS.
As aggregate interest increased, key money managers have been driving this bullishness. Sachem Head Capital, managed by Scott Ferguson, assembled the biggest position in GDS Holdings Limited (NASDAQ:GDS). Sachem Head Capital had $56.1 million invested in the company at the end of the quarter. Philippe Laffont's Coatue Management also initiated a $7.7 million position during the quarter. The other funds with new positions in the stock are David E. Shaw's D E Shaw, Gavin Saitowitz and Cisco J. del Valle's Springbok Capital, and Rob Citrone's Discovery Capital Management.
Let's go over hedge fund activity in other stocks similar to GDS Holdings Limited (NASDAQ:GDS). These stocks are Sonoco Products Company (NYSE:SON), CDK Global Inc (NASDAQ:CDK), Enel Chile S.A. (NYSE:ENIC), and Wix.Com Ltd (NASDAQ:WIX). All of these stocks' market caps are similar to GDS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SON,20,117152,1 CDK,28,473046,-1 ENIC,8,26016,2 WIX,31,986992,5 Average,21.75,400802,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $401 million. That figure was $1127 million in GDS's case. Wix.Com Ltd (NASDAQ:WIX) is the most popular stock in this table. On the other hand Enel Chile S.A. (NYSE:ENIC) is the least popular one with only 8 bullish hedge fund positions. GDS Holdings Limited (NASDAQ:GDS) 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 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 GDS as the stock returned 16.8% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.