The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of The Geo Group, Inc. (NYSE:GEO) and find out how it is affected by hedge funds' moves.
The Geo Group, Inc. (NYSE:GEO) investors should pay attention to an increase in enthusiasm from smart money of late. GEO was in 21 hedge funds' portfolios at the end of the third quarter of 2019. There were 20 hedge funds in our database with GEO positions at the end of the previous quarter. Our calculations also showed that GEO 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.
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 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.
[caption id="attachment_42139" align="aligncenter" width="504"] Ken Heebner of Capital Growth Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a look at the recent hedge fund action regarding The Geo Group, Inc. (NYSE:GEO).
How are hedge funds trading The Geo Group, Inc. (NYSE:GEO)?
Heading into the fourth quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards GEO over the last 17 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Capital Growth Management was the largest shareholder of The Geo Group, Inc. (NYSE:GEO), with a stake worth $33.2 million reported as of the end of September. Trailing Capital Growth Management was Arrowstreet Capital, which amassed a stake valued at $27.3 million. Pentwater Capital Management, Citadel Investment Group, and Intrinsic Edge Capital 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 Capital Growth Management allocated the biggest weight to The Geo Group, Inc. (NYSE:GEO), around 2.54% of its 13F portfolio. Intrinsic Edge Capital is also relatively very bullish on the stock, dishing out 0.71 percent of its 13F equity portfolio to GEO.
As industrywide interest jumped, key hedge funds have jumped into The Geo Group, Inc. (NYSE:GEO) headfirst. Pentwater Capital Management, managed by Matthew Halbower, initiated the largest position in The Geo Group, Inc. (NYSE:GEO). Pentwater Capital Management had $11.7 million invested in the company at the end of the quarter. Mark Coe's Intrinsic Edge Capital also made a $6.3 million investment in the stock during the quarter. The other funds with new positions in the stock are David Costen Haley's HBK Investments, Donald Sussman's Paloma Partners, and Steve Cohen's Point72 Asset Management.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as The Geo Group, Inc. (NYSE:GEO) but similarly valued. These stocks are Adtalem Global Education Inc. (NYSE:ATGE), Acceleron Pharma Inc (NASDAQ:XLRN), Retail Opportunity Investments Corp (NASDAQ:ROIC), and Dana Incorporated (NYSE:DAN). This group of stocks' market valuations are similar to GEO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATGE,22,200763,8 XLRN,23,321739,2 ROIC,18,77228,5 DAN,25,192399,0 Average,22,198032,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $108 million in GEO's case. Dana Incorporated (NYSE:DAN) is the most popular stock in this table. On the other hand Retail Opportunity Investments Corp (NASDAQ:ROIC) is the least popular one with only 18 bullish hedge fund positions. The Geo Group, Inc. (NYSE:GEO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 GEO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); GEO investors were disappointed as the stock returned -17.7% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.