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 Community Health Systems (NYSE:CYH)? The smart money sentiment can provide an answer to this question.
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.
We're going to check out the new hedge fund action surrounding Community Health Systems (NYSE:CYH).
How are hedge funds trading Community Health Systems (NYSE:CYH)?
At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards CYH over the last 15 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.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Paul Singer's Elliott Management has the most valuable position in Community Health Systems (NYSE:CYH), worth close to $16.8 million, corresponding to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Boaz Weinstein of Saba Capital, with a $16.7 million position; 0.7% of its 13F portfolio is allocated to the company. Some other peers with similar optimism comprise Chuck Royce's Royce & Associates, and Jeffrey Altman's Owl Creek Asset Management.
Because Community Health Systems (NYSE:CYH) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of money managers that slashed their positions entirely in the third quarter. At the top of the heap, Steve Cohen's Point72 Asset Management said goodbye to the biggest investment of the "upper crust" of funds followed by Insider Monkey, comprising close to $5.7 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dumped about $2.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 8 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Community Health Systems (NYSE:CYH). We will take a look at CAI International Inc (NYSE:CAI), Senseonics Holdings, Inc. (NYSE:SENS), Silvercorp Metals Inc. (NYSE:SVM), and U.S. Lime & Minerals Inc. (NASDAQ:USLM). This group of stocks' market valuations are closest to CYH's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CAI,16,112720,-1 SENS,10,5479,-4 SVM,9,17911,-3 USLM,4,31382,2 Average,9.75,41873,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $52 million in CYH's case. CAI International Inc (NYSE:CAI) is the most popular stock in this table. On the other hand U.S. Lime & Minerals Inc. (NASDAQ:USLM) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Community Health Systems (NYSE:CYH) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately CYH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CYH were disappointed as the stock returned -24.7% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.