Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
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 32 percentage points since May 2014 through March 12, 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.
Let's review the recent hedge fund action regarding Commerce Bancshares, Inc. (NASDAQ:CBSH).
What have hedge funds been doing with Commerce Bancshares, Inc. (NASDAQ:CBSH)?
At the end of the fourth quarter, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards CBSH over the last 14 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, AQR Capital Management held the most valuable stake in Commerce Bancshares, Inc. (NASDAQ:CBSH), which was worth $40.3 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $26.1 million worth of shares. Moreover, Renaissance Technologies, Two Sigma Advisors, and Arrowstreet Capital were also bullish on Commerce Bancshares, Inc. (NASDAQ:CBSH), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Commerce Bancshares, Inc. (NASDAQ:CBSH) has experienced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of money managers that decided to sell off their positions entirely in the third quarter. At the top of the heap, Martin Whitman's Third Avenue Management sold off the largest investment of the 700 funds watched by Insider Monkey, comprising about $7.1 million in stock. George Hall's fund, Clinton Group, also dumped its stock, about $1.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Commerce Bancshares, Inc. (NASDAQ:CBSH). We will take a look at Gildan Activewear Inc (NYSE:GIL), EPAM Systems Inc (NYSE:EPAM), Dr. Reddy's Laboratories Limited (NYSE:RDY), and Zendesk Inc (NYSE:ZEN). This group of stocks' market valuations are closest to CBSH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GIL,25,511310,7 EPAM,22,80938,1 RDY,10,84442,1 ZEN,53,1794269,9 Average,27.5,617740,4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $618 million. That figure was $82 million in CBSH's case. Zendesk Inc (NYSE:ZEN) is the most popular stock in this table. On the other hand Dr. Reddy's Laboratories Limited (NYSE:RDY) is the least popular one with only 10 bullish hedge fund positions. Commerce Bancshares, Inc. (NASDAQ:CBSH) 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately CBSH wasn't in this group. Hedge funds that bet on CBSH were disappointed as the stock returned 7.4% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.