We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Flex Ltd. (NASDAQ:FLEX).
Flex Ltd. (NASDAQ:FLEX) was in 31 hedge funds' portfolios at the end of the third quarter of 2019. FLEX has seen a decrease in hedge fund interest in recent months. There were 34 hedge funds in our database with FLEX holdings at the end of the previous quarter. Our calculations also showed that FLEX 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.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_26869" align="aligncenter" width="508"] Larry Robbins of Glenview Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the key hedge fund action encompassing Flex Ltd. (NASDAQ:FLEX).
How have hedgies been trading Flex Ltd. (NASDAQ:FLEX)?
At Q3's end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the second quarter of 2019. On the other hand, there were a total of 26 hedge funds with a bullish position in FLEX a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
The largest stake in Flex Ltd. (NASDAQ:FLEX) was held by Glenview Capital, which reported holding $202.4 million worth of stock at the end of September. It was followed by Iridian Asset Management with a $197.7 million position. Other investors bullish on the company included Lyrical Asset Management, Citadel Investment Group, and D E Shaw. In terms of the portfolio weights assigned to each position Sachem Head Capital allocated the biggest weight to Flex Ltd. (NASDAQ:FLEX), around 8.93% of its portfolio. Shannon River Fund Management is also relatively very bullish on the stock, earmarking 8.17 percent of its 13F equity portfolio to FLEX.
Because Flex Ltd. (NASDAQ:FLEX) has witnessed bearish sentiment from hedge fund managers, we can see that there was a specific group of hedgies that slashed their entire stakes in the third quarter. Interestingly, Dmitry Balyasny's Balyasny Asset Management cut the biggest stake of all the hedgies watched by Insider Monkey, worth close to $11.5 million in stock. Jay Petschek and Steven Major's fund, Corsair Capital Management, also dumped its stock, about $4.4 million worth. These transactions are interesting, as total hedge fund interest dropped by 3 funds in the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Flex Ltd. (NASDAQ:FLEX) but similarly valued. We will take a look at Leggett & Platt, Inc. (NYSE:LEG), ITT Inc. (NYSE:ITT), Pegasystems Inc. (NASDAQ:PEGA), and Polaris Inc. (NYSE:PII). All of these stocks' market caps match FLEX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LEG,10,53164,1 ITT,20,516984,-5 PEGA,23,733352,-1 PII,25,358943,1 Average,19.5,415611,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $416 million. That figure was $1478 million in FLEX's case. Polaris Inc. (NYSE:PII) is the most popular stock in this table. On the other hand Leggett & Platt, Inc. (NYSE:LEG) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Flex Ltd. (NASDAQ:FLEX) is more popular among hedge funds. 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. Hedge funds were also right about betting on FLEX as the stock returned 13.4% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.