Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Farfetch Limited (NYSE:FTCH) and see how the stock is affected by the recent hedge fund activity.
Is Farfetch Limited (NYSE:FTCH) the right investment to pursue these days? The best stock pickers are getting less optimistic. The number of long hedge fund positions were trimmed by 19 in recent months. Our calculations also showed that FTCH isn't among the 30 most popular stocks among hedge funds (view 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 some fund managers who are betting on Dow reaching 40000 in a year, 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 take a look at the recent hedge fund action surrounding Farfetch Limited (NYSE:FTCH).
How have hedgies been trading Farfetch Limited (NYSE:FTCH)?
At the end of the second quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -44% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in FTCH over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Tybourne Capital Management was the largest shareholder of Farfetch Limited (NYSE:FTCH), with a stake worth $179.7 million reported as of the end of March. Trailing Tybourne Capital Management was Joho Capital, which amassed a stake valued at $108.3 million. Light Street Capital, Cadian Capital, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Farfetch Limited (NYSE:FTCH) has faced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of money managers who were dropping their positions entirely in the second quarter. It's worth mentioning that Alex Sacerdote's Whale Rock Capital Management sold off the largest position of all the hedgies monitored by Insider Monkey, valued at about $79.5 million in stock, and Jeffrey Talpins's Element Capital Management was right behind this move, as the fund dropped about $22.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 19 funds in the second quarter.
Let's go over hedge fund activity in other stocks similar to Farfetch Limited (NYSE:FTCH). These stocks are First American Financial Corp (NYSE:FAF), NovoCure Limited (NASDAQ:NVCR), Hanesbrands Inc. (NYSE:HBI), and CDK Global Inc (NASDAQ:CDK). All of these stocks' market caps are closest to FTCH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FAF,34,772370,4 NVCR,22,426721,-3 HBI,22,402748,-8 CDK,29,432354,6 Average,26.75,508548,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $509 million. That figure was $599 million in FTCH's case. First American Financial Corp (NYSE:FAF) is the most popular stock in this table. On the other hand NovoCure Limited (NASDAQ:NVCR) is the least popular one with only 22 bullish hedge fund positions. Farfetch Limited (NYSE:FTCH) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately FTCH wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FTCH investors were disappointed as the stock returned -58.5% 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.