At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Choice Hotels International, Inc. (NYSE:CHH) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Choice Hotels International, Inc. (NYSE:CHH) a bargain? The smart money was taking a bullish view. The number of bullish hedge fund positions increased by 6 in recent months. Choice Hotels International, Inc. (NYSE:CHH) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 22. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CHH isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 16 hedge funds in our database with CHH holdings at the end of March. Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Clint Carlson of Carlson Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's check out the recent hedge fund action encompassing Choice Hotels International, Inc. (NYSE:CHH).
How have hedgies been trading Choice Hotels International, Inc. (NYSE:CHH)?
At second quarter's end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the first quarter of 2020. On the other hand, there were a total of 19 hedge funds with a bullish position in CHH 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.
The largest stake in Choice Hotels International, Inc. (NYSE:CHH) was held by Echo Street Capital Management, which reported holding $28.6 million worth of stock at the end of September. It was followed by GLG Partners with a $13.4 million position. Other investors bullish on the company included Citadel Investment Group, Arrowstreet Capital, and Millennium Management. In terms of the portfolio weights assigned to each position Cinctive Capital Management allocated the biggest weight to Choice Hotels International, Inc. (NYSE:CHH), around 0.4% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, dishing out 0.34 percent of its 13F equity portfolio to CHH.
As industrywide interest jumped, specific money managers have jumped into Choice Hotels International, Inc. (NYSE:CHH) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Choice Hotels International, Inc. (NYSE:CHH). Arrowstreet Capital had $10.4 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $9.8 million position during the quarter. The other funds with brand new CHH positions are Clint Carlson's Carlson Capital, Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management, and David Harding's Winton Capital Management.
Let's now take a look at hedge fund activity in other stocks similar to Choice Hotels International, Inc. (NYSE:CHH). We will take a look at Stag Industrial Inc (NYSE:STAG), Cemex SAB de CV (NYSE:CX), Clearway Energy, Inc. (NYSE:CWEN), US Foods Holding Corp. (NYSE:USFD), Devon Energy Corporation (NYSE:DVN), MAXIMUS, Inc. (NYSE:MMS), and Nomad Foods Limited (NYSE:NOMD). This group of stocks' market caps are closest to CHH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STAG,14,52823,-1 CX,13,157223,1 CWEN,19,233275,2 USFD,35,561892,2 DVN,45,403872,3 MMS,26,158400,0 NOMD,34,437867,0 Average,26.6,286479,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.6 hedge funds with bullish positions and the average amount invested in these stocks was $286 million. That figure was $97 million in CHH's case. Devon Energy Corporation (NYSE:DVN) is the most popular stock in this table. On the other hand Cemex SAB de CV (NYSE:CX) is the least popular one with only 13 bullish hedge fund positions. Choice Hotels International, Inc. (NYSE:CHH) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CHH is 54.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately CHH wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CHH investors were disappointed as the stock returned 8.9% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.