Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren't very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds' top 20 stock picks easily bested the broader market, at 18.7% compared to 12.1%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn't perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Is Apple Hospitality REIT Inc (NYSE:APLE) ready to rally soon? Money managers are becoming more confident. The number of long hedge fund bets improved by 2 lately. Our calculations also showed that APLE isn't among the 30 most popular stocks among hedge funds. APLE was in 13 hedge funds' portfolios at the end of March. There were 11 hedge funds in our database with APLE positions at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 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.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
Let's view the recent hedge fund action encompassing Apple Hospitality REIT Inc (NYSE:APLE).
What have hedge funds been doing with Apple Hospitality REIT Inc (NYSE:APLE)?
At Q1's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from the previous quarter. The graph below displays the number of hedge funds with bullish position in APLE over the last 15 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Apple Hospitality REIT Inc (NYSE:APLE), which was worth $55.6 million at the end of the first quarter. On the second spot was Citadel Investment Group which amassed $7.9 million worth of shares. Moreover, Forward Management, Millennium Management, and D E Shaw were also bullish on Apple Hospitality REIT Inc (NYSE:APLE), allocating a large percentage of their portfolios to this stock.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. AQR Capital Management, managed by Cliff Asness, assembled the most valuable position in Apple Hospitality REIT Inc (NYSE:APLE). AQR Capital Management had $0.6 million invested in the company at the end of the quarter. David Harding's Winton Capital Management also made a $0.3 million investment in the stock during the quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Apple Hospitality REIT Inc (NYSE:APLE) but similarly valued. These stocks are Churchill Downs Incorporated (NASDAQ:CHDN), Umpqua Holdings Corp (NASDAQ:UMPQ), Graham Holdings Co (NYSE:GHC), and Trex Company, Inc. (NYSE:TREX). This group of stocks' market caps are closest to APLE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHDN,29,519547,3 UMPQ,20,218914,0 GHC,15,573233,-4 TREX,20,82364,6 Average,21,348515,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $349 million. That figure was $88 million in APLE's case. Churchill Downs Incorporated (NASDAQ:CHDN) is the most popular stock in this table. On the other hand Graham Holdings Co (NYSE:GHC) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Apple Hospitality REIT Inc (NYSE:APLE) is even less popular than GHC. Hedge funds dodged a bullet by taking a bearish stance towards APLE. Our calculations showed that the top 20 most popular hedge fund stocks returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately APLE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); APLE investors were disappointed as the stock returned 0% during the same time frame 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 13 of these stocks already outperformed the market so far in the second quarter.
Disclosure: None. This article was originally published at Insider Monkey.