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 Graham Holdings Co (NYSE:GHC) and determine whether hedge funds had an edge regarding this stock.
Graham Holdings Co (NYSE:GHC) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 28. GHC has experienced an increase in hedge fund sentiment of late. There were 21 hedge funds in our database with GHC positions at the end of the first quarter. Our calculations also showed that GHC isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ray Dalio of Bridgewater Associates
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let's take a glance at the latest hedge fund action encompassing Graham Holdings Co (NYSE:GHC).
How are hedge funds trading Graham Holdings Co (NYSE:GHC)?
At the end of June, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GHC over the last 20 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Southeastern Asset Management held the most valuable stake in Graham Holdings Co (NYSE:GHC), which was worth $105.7 million at the end of the third quarter. On the second spot was Wallace Capital Management which amassed $50.5 million worth of shares. AQR Capital Management, Renaissance Technologies, and Madison Avenue Partners were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Wallace Capital Management allocated the biggest weight to Graham Holdings Co (NYSE:GHC), around 9.22% of its 13F portfolio. Madison Avenue Partners is also relatively very bullish on the stock, dishing out 7.14 percent of its 13F equity portfolio to GHC.
With a general bullishness amongst the heavyweights, specific money managers have jumped into Graham Holdings Co (NYSE:GHC) headfirst. Laurion Capital Management, managed by Benjamin A. Smith, established the most outsized position in Graham Holdings Co (NYSE:GHC). Laurion Capital Management had $0.7 million invested in the company at the end of the quarter. Ray Dalio's Bridgewater Associates also made a $0.5 million investment in the stock during the quarter. The only other fund with a brand new GHC position is Tom Russo's Gardner Russo & Gardner.
Let's go over hedge fund activity in other stocks similar to Graham Holdings Co (NYSE:GHC). These stocks are CommVault Systems, Inc. (NASDAQ:CVLT), Pebblebrook Hotel Trust (NYSE:PEB), KAR Auction Services Inc (NYSE:KAR), Allegiant Travel Company (NASDAQ:ALGT), The Simply Good Foods Company (NASDAQ:SMPL), SJW Group (NYSE:SJW), and Liberty Latin America Ltd. (NASDAQ:LILA). This group of stocks' market caps are similar to GHC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVLT,22,396917,4 PEB,13,137590,3 KAR,30,302345,9 ALGT,23,334831,4 SMPL,26,138560,7 SJW,11,84916,1 LILA,15,102005,3 Average,20,213881,4.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $279 million in GHC's case. KAR Auction Services Inc (NYSE:KAR) is the most popular stock in this table. On the other hand SJW Group (NYSE:SJW) is the least popular one with only 11 bullish hedge fund positions. Graham Holdings Co (NYSE:GHC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for GHC is 58.5. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on GHC as the stock returned 18.4% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.