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Hedge Funds Dropped The Ball On China Southern Airlines Co Ltd (ZNH)

Reymerlyn Martin

Is China Southern Airlines Co Ltd (NYSE:ZNH) a good investment right now? We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably but historically their consensus stock picks outperformed the market after adjusting for known risk factors.

China Southern Airlines Co Ltd (NYSE:ZNH) was in 4 hedge funds' portfolios at the end of the fourth quarter of 2018. ZNH shareholders have witnessed a decrease in hedge fund sentiment of late. There were 5 hedge funds in our database with ZNH holdings at the end of the previous quarter. Our calculations also showed that ZNH isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

John Overdeck of Two Sigma

Let's take a look at the key hedge fund action encompassing China Southern Airlines Co Ltd (NYSE:ZNH).

What does the smart money think about China Southern Airlines Co Ltd (NYSE:ZNH)?

At Q4's end, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the previous quarter. By comparison, 4 hedge funds held shares or bullish call options in ZNH a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ZNH_apr2019

The largest stake in China Southern Airlines Co Ltd (NYSE:ZNH) was held by Renaissance Technologies, which reported holding $12.9 million worth of stock at the end of September. It was followed by Marshall Wace LLP with a $0.8 million position. Other investors bullish on the company included Two Sigma Advisors and Millennium Management.

Seeing as China Southern Airlines Co Ltd (NYSE:ZNH) has experienced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of money managers that decided to sell off their positions entirely last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the biggest stake of the 700 funds followed by Insider Monkey, totaling an estimated $0.9 million in stock. Ken Griffin's fund, Citadel Investment Group, also cut its stock, about $0.3 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to China Southern Airlines Co Ltd (NYSE:ZNH). These stocks are Ionis Pharmaceuticals, Inc. (NASDAQ:IONS), TIM Participacoes SA (NYSE:TSU), Tripadvisor Inc (NASDAQ:TRIP), and Credit Acceptance Corp. (NASDAQ:CACC). This group of stocks' market caps are similar to ZNH's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IONS,21,140938,-1 TSU,14,320035,-2 TRIP,29,1521641,3 CACC,22,990354,2 Average,21.5,743242,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $743 million. That figure was $14 million in ZNH's case. Tripadvisor Inc (NASDAQ:TRIP) is the most popular stock in this table. On the other hand TIM Participacoes SA (NYSE:TSU) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks China Southern Airlines Co Ltd (NYSE:ZNH) is even less popular than TSU. Hedge funds clearly missed out on a great investment opportunity. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Only four hedge funds were also right about betting on ZNH as the stock returned 61.9% and outperformed the market as well. You can see the entire list of these shrewd hedge funds here.

Disclosure: None. This article was originally published at Insider Monkey.

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