While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Bright Scholar Education Holdings Limited (NYSE:BEDU).
Bright Scholar Education Holdings Limited (NYSE:BEDU) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds' portfolios at the end of the third quarter of 2019. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Raven Industries, Inc. (NASDAQ:RAVN), RPC, Inc. (NYSE:RES), and Helix Energy Solutions Group Inc. (NYSE:HLX) to gather more data points. Our calculations also showed that BEDU 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.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_365194" align="aligncenter" width="600"] 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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's take a look at the new hedge fund action regarding Bright Scholar Education Holdings Limited (NYSE:BEDU).
Hedge fund activity in Bright Scholar Education Holdings Limited (NYSE:BEDU)
At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in BEDU a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Indus Capital, managed by David Kowitz and Sheldon Kasowitz, holds the largest position in Bright Scholar Education Holdings Limited (NYSE:BEDU). Indus Capital has a $50.7 million position in the stock, comprising 8.4% of its 13F portfolio. On Indus Capital's heels is Hillhouse Capital Management, led by Lei Zhang, holding a $38.5 million position; 0.5% of its 13F portfolio is allocated to the company. Other professional money managers that hold long positions consist of Wang Chan's Serenity Capital, Renaissance Technologies and David E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Indus Capital allocated the biggest weight to Bright Scholar Education Holdings Limited (NYSE:BEDU), around 8.44% of its 13F portfolio. Serenity Capital is also relatively very bullish on the stock, earmarking 4.9 percent of its 13F equity portfolio to BEDU.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Trellus Management Company. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Hillhouse Capital Management).
Let's now take a look at hedge fund activity in other stocks similar to Bright Scholar Education Holdings Limited (NYSE:BEDU). These stocks are Raven Industries, Inc. (NASDAQ:RAVN), RPC, Inc. (NYSE:RES), Helix Energy Solutions Group Inc. (NYSE:HLX), and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY). All of these stocks' market caps resemble BEDU's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RAVN,11,92626,-1 RES,12,66333,-4 HLX,13,70293,2 PLAY,18,278866,-3 Average,13.5,127030,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $127 million. That figure was $116 million in BEDU's case. Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) is the most popular stock in this table. On the other hand Raven Industries, Inc. (NASDAQ:RAVN) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Bright Scholar Education Holdings Limited (NYSE:BEDU) is even less popular than RAVN. Hedge funds dodged a bullet by taking a bearish stance towards BEDU. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BEDU wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); BEDU investors were disappointed as the stock returned -2% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.