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Hedge Funds Are Selling Chunghwa Telecom Co., Ltd (CHT)

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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Chunghwa Telecom Co., Ltd (NYSE:CHT).

Chunghwa Telecom Co., Ltd (NYSE:CHT) has seen a decrease in hedge fund sentiment in recent months. Chunghwa Telecom Co., Ltd (NYSE:CHT) was in 3 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 10. Our calculations also showed that CHT isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by 115 percentage points since March 2017 (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.

David E. Shaw of D.E. Shaw
David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's take a look at the latest hedge fund action encompassing Chunghwa Telecom Co., Ltd (NYSE:CHT).

Do Hedge Funds Think CHT Is A Good Stock To Buy Now?

At Q1's end, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -40% from the fourth quarter of 2020. On the other hand, there were a total of 6 hedge funds with a bullish position in CHT a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Chunghwa Telecom Co., Ltd (NYSE:CHT) was held by Renaissance Technologies, which reported holding $150.9 million worth of stock at the end of December. It was followed by D E Shaw with a $2.1 million position. The only other hedge fund that is bullish on the company was Ovata Capital Management.

Because Chunghwa Telecom Co., Ltd (NYSE:CHT) has experienced declining sentiment from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds who were dropping their positions entirely by the end of the first quarter. At the top of the heap, Israel Englander's Millennium Management sold off the biggest investment of the "upper crust" of funds tracked by Insider Monkey, comprising close to $1.4 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund dumped about $0.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds by the end of the first quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Chunghwa Telecom Co., Ltd (NYSE:CHT) but similarly valued. We will take a look at SBA Communications Corporation (NASDAQ:SBAC), Skyworks Solutions Inc (NASDAQ:SWKS), Fortinet Inc (NASDAQ:FTNT), Welltower Inc. (NYSE:WELL), Eversource Energy (NYSE:ES), Sun Life Financial Inc. (NYSE:SLF), and State Street Corporation (NYSE:STT). This group of stocks' market caps match CHT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBAC,38,2090468,-5 SWKS,33,765774,-8 FTNT,23,906297,-9 WELL,21,326506,-5 ES,24,421208,0 SLF,17,139250,-2 STT,32,866316,1 Average,26.9,787974,-4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.9 hedge funds with bullish positions and the average amount invested in these stocks was $788 million. That figure was $153 million in CHT's case. SBA Communications Corporation (NASDAQ:SBAC) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Chunghwa Telecom Co., Ltd (NYSE:CHT) is even less popular than SLF. Our overall hedge fund sentiment score for CHT is 12. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds dodged a bullet by taking a bearish stance towards CHT. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th but managed to beat the market again by 3.3 percentage points. Unfortunately CHT wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); CHT investors were disappointed as the stock returned 6.4% since the end of the first quarter (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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

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