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Hedge Funds Have Never Been Less Bullish On J.C. Penney Company, Inc. (JCP)

Nina Todic

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% 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 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

J.C. Penney Company, Inc. (NYSE:JCP) investors should pay attention to a decrease in hedge fund sentiment lately. Our calculations also showed that JCP 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.

5 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

David Harding

Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We're going to take a gander at the latest hedge fund action surrounding J.C. Penney Company, Inc. (NYSE:JCP).

How are hedge funds trading J.C. Penney Company, Inc. (NYSE:JCP)?

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in JCP a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

No of Hedge Funds with JCP Positions

More specifically, Harbor Spring Capital was the largest shareholder of J.C. Penney Company, Inc. (NYSE:JCP), with a stake worth $9.6 million reported as of the end of March. Trailing Harbor Spring Capital was Winton Capital Management, which amassed a stake valued at $7.7 million. D E Shaw, Masters Capital Management, and Tyvor Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Because J.C. Penney Company, Inc. (NYSE:JCP) has faced bearish sentiment from the smart money, it's easy to see that there exists a select few fund managers that slashed their entire stakes by the end of the second quarter. At the top of the heap, Michael Platt and William Reeves's BlueCrest Capital Mgmt. said goodbye to the largest position of the 750 funds watched by Insider Monkey, comprising close to $0.4 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also sold off its stock, about $0.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 1 funds by the end of the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as J.C. Penney Company, Inc. (NYSE:JCP) but similarly valued. These stocks are COMSCORE, Inc. (NASDAQ:SCOR), West Bancorporation, Inc. (NASDAQ:WTBA), Home Bancorp, Inc. (NASDAQ:HBCP), and EverBank Financial Corp (NYSE:EVER). This group of stocks' market values match JCP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCOR,17,82124,3 WTBA,4,8432,2 HBCP,2,8930,-1 EVER,11,25200,1 Average,8.5,31172,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $34 million in JCP's case. COMSCORE, Inc. (NASDAQ:SCOR) is the most popular stock in this table. On the other hand Home Bancorp, Inc. (NASDAQ:HBCP) is the least popular one with only 2 bullish hedge fund positions. J.C. Penney Company, Inc. (NYSE:JCP) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately JCP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on JCP were disappointed as the stock returned -21.9% during the third 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 many of these stocks already outperformed the market so far this year.

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

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