Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Graham Holdings Co (NYSE:GHC) to find out whether it was one of their high conviction long-term ideas.
Graham Holdings Co (NYSE:GHC) investors should be aware of a decrease in enthusiasm from smart money lately. Our calculations also showed that GHC isn't among the 30 most popular stocks among hedge funds.
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 take a glance at the recent hedge fund action regarding Graham Holdings Co (NYSE:GHC).
What does smart money think about Graham Holdings Co (NYSE:GHC)?
Heading into the second quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in GHC a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Southeastern Asset Management held the most valuable stake in Graham Holdings Co (NYSE:GHC), which was worth $350.4 million at the end of the first quarter. On the second spot was AQR Capital Management which amassed $91.6 million worth of shares. Moreover, Wallace Capital Management, Renaissance Technologies, and Arrowstreet Capital were also bullish on Graham Holdings Co (NYSE:GHC), allocating a large percentage of their portfolios to this stock.
Seeing as Graham Holdings Co (NYSE:GHC) has witnessed bearish sentiment from the aggregate hedge fund industry, it's easy to see that there were a few funds who were dropping their entire stakes in the third quarter. Intriguingly, Israel Englander's Millennium Management dropped the biggest position of all the hedgies watched by Insider Monkey, worth an estimated $1 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund sold off about $0.6 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 4 funds in the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Graham Holdings Co (NYSE:GHC) but similarly valued. These stocks are Trex Company, Inc. (NYSE:TREX), Dicks Sporting Goods Inc (NYSE:DKS), Black Stone Minerals LP (NYSE:BSM), and Eldorado Resorts Inc (NASDAQ:ERI). This group of stocks' market valuations match GHC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TREX,20,82364,6 DKS,20,303166,-2 BSM,5,9741,0 ERI,31,549919,2 Average,19,236298,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $236 million. That figure was $573 million in GHC's case. Eldorado Resorts Inc (NASDAQ:ERI) is the most popular stock in this table. On the other hand Black Stone Minerals LP (NYSE:BSM) is the least popular one with only 5 bullish hedge fund positions. Graham Holdings Co (NYSE:GHC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on GHC, though not to the same extent, as the stock returned 4.2% during the same time frame and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.