Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to New Oriental Education & Tech Group Inc. (NYSE:EDU) changed recently.
New Oriental Education & Tech Group Inc. (NYSE:EDU) was in 35 hedge funds' portfolios at the end of September. EDU has seen an increase in enthusiasm from smart money in recent months. There were 32 hedge funds in our database with EDU holdings at the end of the previous quarter. Our calculations also showed that EDU 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.
[caption id="attachment_337892" align="aligncenter" width="500"] Lei Zhang of Hillhouse Capital 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. We're going to take a gander at the latest hedge fund action encompassing New Oriental Education & Tech Group Inc. (NYSE:EDU).
How are hedge funds trading New Oriental Education & Tech Group Inc. (NYSE:EDU)?
At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards EDU over the last 17 quarters. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
The largest stake in New Oriental Education & Tech Group Inc. (NYSE:EDU) was held by Hillhouse Capital Management, which reported holding $305.8 million worth of stock at the end of September. It was followed by Tiger Global Management with a $260.7 million position. Other investors bullish on the company included Alkeon Capital Management, Melvin Capital Management, and Tairen Capital. In terms of the portfolio weights assigned to each position Tairen Capital allocated the biggest weight to New Oriental Education & Tech Group Inc. (NYSE:EDU), around 13.27% of its portfolio. Kylin Management is also relatively very bullish on the stock, setting aside 13.1 percent of its 13F equity portfolio to EDU.
As industrywide interest jumped, key hedge funds were leading the bulls' herd. Hillhouse Capital Management, managed by Lei Zhang, assembled the largest position in New Oriental Education & Tech Group Inc. (NYSE:EDU). Hillhouse Capital Management had $305.8 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $80.7 million position during the quarter. The following funds were also among the new EDU investors: Gabriel Plotkin's Melvin Capital Management, Benjamin A. Smith's Laurion Capital Management, and Guardian Capital's GuardCap Asset Management.
Let's now review hedge fund activity in other stocks similar to New Oriental Education & Tech Group Inc. (NYSE:EDU). These stocks are Healthpeak Properties, Inc. (NYSE:HCP), Alexandria Real Estate Equities Inc (NYSE:ARE), STMicroelectronics N.V. (NYSE:STM), and Mettler-Toledo International Inc. (NYSE:MTD). This group of stocks' market caps are similar to EDU's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HCP,25,562264,-1 ARE,21,343145,-6 STM,11,94533,-2 MTD,22,326854,2 Average,19.75,331699,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $332 million. That figure was $1511 million in EDU's case. Healthpeak Properties, Inc. (NYSE:HCP) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks New Oriental Education & Tech Group Inc. (NYSE:EDU) is more popular among hedge funds. 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. Hedge funds were also right about betting on EDU, though not to the same extent, as the stock returned 9.3% during the fourth quarter (through the end of November) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.