Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Secoo Holding Limited (NASDAQ:SECO)? The smart money sentiment can provide an answer to this question.
Secoo Holding Limited (NASDAQ:SECO) investors should pay attention to a decrease in hedge fund interest lately. SECO was in 4 hedge funds' portfolios at the end of September. There were 7 hedge funds in our database with SECO holdings at the end of the previous quarter. Our calculations also showed that SECO 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_365194" align="aligncenter" width="450"] David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's take a look at the recent hedge fund action surrounding Secoo Holding Limited (NASDAQ:SECO).
How are hedge funds trading Secoo Holding Limited (NASDAQ:SECO)?
At Q3's end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -43% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SECO over the last 17 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Indus Capital, managed by David Kowitz and Sheldon Kasowitz, holds the largest position in Secoo Holding Limited (NASDAQ:SECO). Indus Capital has a $12.8 million position in the stock, comprising 2.1% of its 13F portfolio. Sitting at the No. 2 spot is Pelham Capital, led by Ross Turner, holding a $6.2 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism consist of Renaissance Technologies, David E. Shaw's D E Shaw and . In terms of the portfolio weights assigned to each position Indus Capital allocated the biggest weight to Secoo Holding Limited (NASDAQ:SECO), around 2.14% of its 13F portfolio. Pelham Capital is also relatively very bullish on the stock, designating 0.69 percent of its 13F equity portfolio to SECO.
Judging by the fact that Secoo Holding Limited (NASDAQ:SECO) has faced falling interest from the entirety of the hedge funds we track, we can see that there was a specific group of funds who were dropping their full holdings by the end of the third quarter. Interestingly, Israel Englander's Millennium Management cut the largest investment of the "upper crust" of funds tracked by Insider Monkey, comprising about $0.1 million in stock, and Simon Sadler's Segantii Capital was right behind this move, as the fund cut about $0.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Secoo Holding Limited (NASDAQ:SECO) but similarly valued. These stocks are Cadiz Inc (NASDAQ:CDZI), Harpoon Therapeutics, Inc. (NASDAQ:HARP), Peoples Financial Services Corp. (NASDAQ:PFIS), and Southern Missouri Bancorp, Inc. (NASDAQ:SMBC). This group of stocks' market caps are similar to SECO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CDZI,5,44191,-4 HARP,8,69242,2 PFIS,1,3156,0 SMBC,3,18268,0 Average,4.25,33714,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.25 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $20 million in SECO's case. Harpoon Therapeutics, Inc. (NASDAQ:HARP) is the most popular stock in this table. On the other hand Peoples Financial Services Corp. (NASDAQ:PFIS) is the least popular one with only 1 bullish hedge fund positions. Secoo Holding Limited (NASDAQ:SECO) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SECO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SECO investors were disappointed as the stock returned -6.4% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.