"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Nasdaq, Inc. (NASDAQ:NDAQ) and see how it was affected.
Nasdaq, Inc. (NASDAQ:NDAQ) was in 21 hedge funds' portfolios at the end of the third quarter of 2019. NDAQ investors should pay attention to an increase in hedge fund interest in recent months. There were 20 hedge funds in our database with NDAQ positions at the end of the previous quarter. Our calculations also showed that NDAQ 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_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/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. We're going to take a gander at the new hedge fund action surrounding Nasdaq, Inc. (NASDAQ:NDAQ).
Hedge fund activity in Nasdaq, Inc. (NASDAQ:NDAQ)
At Q3's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in NDAQ a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
More specifically, Two Sigma Advisors was the largest shareholder of Nasdaq, Inc. (NASDAQ:NDAQ), with a stake worth $26.2 million reported as of the end of September. Trailing Two Sigma Advisors was Balyasny Asset Management, which amassed a stake valued at $24.6 million. Millennium Management, Adage Capital Management, and Sloane Robinson Investment Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Sloane Robinson Investment Management allocated the biggest weight to Nasdaq, Inc. (NASDAQ:NDAQ), around 4.86% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, earmarking 0.91 percent of its 13F equity portfolio to NDAQ.
Now, key money managers were breaking ground themselves. Winton Capital Management, managed by David Harding, assembled the largest position in Nasdaq, Inc. (NASDAQ:NDAQ). Winton Capital Management had $10 million invested in the company at the end of the quarter. Jeffrey Talpins's Element Capital Management also initiated a $1.9 million position during the quarter. The following funds were also among the new NDAQ investors: Mike Vranos's Ellington and Michael Gelband's ExodusPoint Capital.
Let's go over hedge fund activity in other stocks similar to Nasdaq, Inc. (NASDAQ:NDAQ). These stocks are Markel Corporation (NYSE:MKL), First Republic Bank (NYSE:FRC), W.W. Grainger, Inc. (NYSE:GWW), and Trip.com Group Limited (NASDAQ:CTRP). This group of stocks' market caps resemble NDAQ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MKL,28,1394617,3 FRC,19,815413,-3 GWW,22,526223,1 CTRP,35,876950,8 Average,26,903301,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $903 million. That figure was $134 million in NDAQ's case. Trip.com Group Limited (NASDAQ:CTRP) is the most popular stock in this table. On the other hand First Republic Bank (NYSE:FRC) is the least popular one with only 19 bullish hedge fund positions. Nasdaq, Inc. (NASDAQ:NDAQ) 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 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. Unfortunately NDAQ wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NDAQ investors were disappointed as the stock returned 5.5% during the first two months of the fourth quarter 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 in Q4.
Disclosure: None. This article was originally published at Insider Monkey.