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 24.4% compared to 20.4%, 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.
Flex Ltd. (NASDAQ:FLEX) shareholders have witnessed an increase in activity from the world's largest hedge funds of late. Our calculations also showed that FLEX isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's analyze the recent hedge fund action encompassing Flex Ltd. (NASDAQ:FLEX).
What does smart money think about Flex Ltd. (NASDAQ:FLEX)?
At Q2's end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 26% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FLEX over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Flex Ltd. (NASDAQ:FLEX) was held by Glenview Capital, which reported holding $185 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $170.1 million position. Other investors bullish on the company included D E Shaw, Iridian Asset Management, and Pzena Investment Management.
Consequently, key hedge funds were leading the bulls' herd. Iridian Asset Management, managed by David Cohen and Harold Levy, created the most valuable position in Flex Ltd. (NASDAQ:FLEX). Iridian Asset Management had $156.1 million invested in the company at the end of the quarter. Kevin Cottrell and Chris LaSusa's KCL Capital also initiated a $23.9 million position during the quarter. The other funds with new positions in the stock are Benjamin A. Smith's Laurion Capital Management, Michael Gelband's ExodusPoint Capital, and Peter S. Park's Park West Asset Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Flex Ltd. (NASDAQ:FLEX) but similarly valued. These stocks are Shell Midstream Partners LP (NYSE:SHLX), GDS Holdings Limited (NASDAQ:GDS), Equitrans Midstream Corporation (NYSE:ETRN), and Nexstar Media Group, Inc. (NASDAQ:NXST). This group of stocks' market values resemble FLEX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SHLX,5,11536,-2 GDS,28,1106492,-5 ETRN,16,551346,-3 NXST,40,1117748,9 Average,22.25,696781,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $697 million. That figure was $994 million in FLEX's case. Nexstar Media Group, Inc. (NASDAQ:NXST) is the most popular stock in this table. On the other hand Shell Midstream Partners LP (NYSE:SHLX) is the least popular one with only 5 bullish hedge fund positions. Flex Ltd. (NASDAQ:FLEX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on FLEX as the stock returned 9.4% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.