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Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
China Yuchai International Limited (NYSE:CYD) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Ennis, Inc. (NYSE:EBF), OrthoPediatrics Corp. (NASDAQ:KIDS), and Synthorx, Inc. (NASDAQ:THOR) to gather more data points. Our calculations also showed that CYD isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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. 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.
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John Overdeck of Two Sigma Advisors[/caption]
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We're going to take a gander at the fresh hedge fund action encompassing China Yuchai International Limited (NYSE:CYD).
What have hedge funds been doing with China Yuchai International Limited (NYSE:CYD)?
At Q3's end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 8 hedge funds with a bullish position in CYD a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in China Yuchai International Limited (NYSE:CYD) was held by Shah Capital Management, which reported holding $45.1 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $6.5 million position. Other investors bullish on the company included Chou Associates Management, Two Sigma Advisors, and Sensato Capital Management. In terms of the portfolio weights assigned to each position Shah Capital Management allocated the biggest weight to China Yuchai International Limited (NYSE:CYD), around 24.34% of its 13F portfolio. Chou Associates Management is also relatively very bullish on the stock, earmarking 0.58 percent of its 13F equity portfolio to CYD.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Springbok Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Marshall Wace).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as China Yuchai International Limited (NYSE:CYD) but similarly valued. We will take a look at Ennis, Inc. (NYSE:EBF), OrthoPediatrics Corp. (NASDAQ:KIDS), Synthorx, Inc. (NASDAQ:THOR), and eXp World Holdings, Inc. (NASDAQ:EXPI). This group of stocks' market caps match CYD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EBF,11,68783,-1 KIDS,7,31059,-1 THOR,7,280891,0 EXPI,5,4434,3 Average,7.5,96292,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $96 million. That figure was $55 million in CYD's case. Ennis, Inc. (NYSE:EBF) is the most popular stock in this table. On the other hand eXp World Holdings, Inc. (NASDAQ:EXPI) is the least popular one with only 5 bullish hedge fund positions. China Yuchai International Limited (NYSE:CYD) is not the most popular stock in this group but hedge fund interest is still above average. 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 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. Unfortunately CYD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CYD were disappointed as the stock returned 3.9% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.