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.
Hedge fund interest in Career Education Corp. (NASDAQ:CECO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CECO to other stocks including Grupo Simec S.A.B. de C.V. (NYSE:SIM), Alector, Inc. (NASDAQ:ALEC), and Materion Corp (NYSE:MTRN) to get a better sense of its popularity. Our calculations also showed that CECO 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.
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.
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. We're going to check out the recent hedge fund action regarding Career Education Corp. (NASDAQ:CECO).
How are hedge funds trading Career Education Corp. (NASDAQ:CECO)?
At Q2's end, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CECO over the last 16 quarters. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Renaissance Technologies, holds the most valuable position in Career Education Corp. (NASDAQ:CECO). Renaissance Technologies has a $83.4 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is SG Capital Management, managed by Ken Grossman and Glen Schneider, which holds a $29.6 million position; 4.7% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism include Chet Kapoor's Tenzing Global Investors, D. E. Shaw's D E Shaw and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.
Since Career Education Corp. (NASDAQ:CECO) has faced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there were a few hedge funds that decided to sell off their positions entirely last quarter. It's worth mentioning that Jerome L. Simon's Lonestar Capital Management dumped the largest investment of all the hedgies followed by Insider Monkey, totaling about $12.9 million in stock, and Peter Muller's PDT Partners was right behind this move, as the fund sold off about $0.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to Career Education Corp. (NASDAQ:CECO). These stocks are Grupo Simec S.A.B. de C.V. (NYSE:SIM), Alector, Inc. (NASDAQ:ALEC), Materion Corp (NYSE:MTRN), and Talos Energy, Inc. (NYSE:TALO). This group of stocks' market caps are closest to CECO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SIM,1,2045,-1 ALEC,13,347529,1 MTRN,15,112610,-2 TALO,14,66272,-3 Average,10.75,132114,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $216 million in CECO's case. Materion Corp (NYSE:MTRN) is the most popular stock in this table. On the other hand Grupo Simec S.A.B. de C.V. (NYSE:SIM) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Career Education Corp. (NASDAQ:CECO) is more popular among hedge funds. 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 CECO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CECO were disappointed as the stock returned -16.7% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.