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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 Green Dot Corporation (NYSE:GDOT) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Green Dot Corporation (NYSE:GDOT) ready to rally soon? The smart money was taking a bullish view. The number of bullish hedge fund positions improved by 1 lately. Green Dot Corporation (NYSE:GDOT) was in 23 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. Our calculations also showed that GDOT 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).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Philippe Laffont of Coatue Management
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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. 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 take a gander at the fresh hedge fund action surrounding Green Dot Corporation (NYSE:GDOT).
What have hedge funds been doing with Green Dot Corporation (NYSE:GDOT)?
At the end of June, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GDOT over the last 20 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Starboard Value LP was the largest shareholder of Green Dot Corporation (NYSE:GDOT), with a stake worth $217.2 million reported as of the end of September. Trailing Starboard Value LP was No Street Capital, which amassed a stake valued at $109.9 million. Brahman Capital, Coatue Management, and Two Sigma Advisors 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 No Street Capital allocated the biggest weight to Green Dot Corporation (NYSE:GDOT), around 14.14% of its 13F portfolio. Starboard Value LP is also relatively very bullish on the stock, designating 7.74 percent of its 13F equity portfolio to GDOT.
As industrywide interest jumped, specific money managers were leading the bulls' herd. Brahman Capital, managed by Mitch Kuflik and Rob Sobel, created the largest position in Green Dot Corporation (NYSE:GDOT). Brahman Capital had $63 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also initiated a $16.1 million position during the quarter. The other funds with brand new GDOT positions are Renaissance Technologies, Jeffrey Hoffner's Engle Capital, and Brian C. Freckmann's Lyon Street Capital.
Let's now take a look at hedge fund activity in other stocks similar to Green Dot Corporation (NYSE:GDOT). We will take a look at Advanced Energy Industries, Inc. (NASDAQ:AEIS), Acushnet Holdings Corp. (NYSE:GOLF), Webster Financial Corporation (NYSE:WBS), Pluralsight, Inc. (NASDAQ:PS), Papa John's International, Inc. (NASDAQ:PZZA), Sanderson Farms, Inc. (NASDAQ:SAFM), and Rapid7 Inc (NASDAQ:RPD). This group of stocks' market valuations are closest to GDOT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AEIS,21,81139,7 GOLF,11,31850,-1 WBS,30,245581,-3 PS,27,233743,9 PZZA,34,404173,5 SAFM,22,205175,5 RPD,14,64535,-2 Average,22.7,180885,2.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.7 hedge funds with bullish positions and the average amount invested in these stocks was $181 million. That figure was $701 million in GDOT's case. Papa John's International, Inc. (NASDAQ:PZZA) is the most popular stock in this table. On the other hand Acushnet Holdings Corp. (NYSE:GOLF) is the least popular one with only 11 bullish hedge fund positions. Green Dot Corporation (NYSE:GDOT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GDOT is 57.6. 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 positive signal but 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 beat the market by 19.3 percentage points. Unfortunately GDOT wasn't nearly as popular as these 10 stocks and hedge funds that were betting on GDOT were disappointed as the stock returned 3.1% in Q3 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.