It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. 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 National HealthCare Corporation (NYSEAMERICAN:NHC).
Is National HealthCare Corporation (NYSEAMERICAN:NHC) a great investment now? Money managers are getting less optimistic. The number of long hedge fund positions went down by 2 lately. Our calculations also showed that NHC 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_673876" align="aligncenter" width="1613"] John Overdeck of Two Sigma Advisors[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind we're going to review the key hedge fund action surrounding National HealthCare Corporation (NYSEAMERICAN:NHC).
How are hedge funds trading National HealthCare Corporation (NYSEAMERICAN:NHC)?
At Q3's end, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from the previous quarter. On the other hand, there were a total of 10 hedge funds with a bullish position in NHC a year ago. With hedge funds' capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Renaissance Technologies, founded by Jim Simons, holds the most valuable position in National HealthCare Corporation (NYSEAMERICAN:NHC). Renaissance Technologies has a $53.8 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies's heels is Winton Capital Management, led by David Harding, holding a $5.8 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions contain Cliff Asness's AQR Capital Management, and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to National HealthCare Corporation (NYSEAMERICAN:NHC), around 0.45% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to NHC.
Due to the fact that National HealthCare Corporation (NYSEAMERICAN:NHC) has faced bearish sentiment from the smart money, it's safe to say that there was a specific group of hedgies that elected to cut their positions entirely last quarter. Intriguingly, Ken Griffin's Citadel Investment Group cut the largest stake of the "upper crust" of funds monitored by Insider Monkey, totaling an estimated $0.4 million in stock. Ronald Hua's fund, Qtron Investments, also said goodbye to its stock, about $0.3 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds last quarter.
Let's now take a look at hedge fund activity in other stocks similar to National HealthCare Corporation (NYSEAMERICAN:NHC). These stocks are City Holding Company (NASDAQ:CHCO), NOW Inc (NYSE:DNOW), Methode Electronics Inc. (NYSE:MEI), and Saul Centers Inc (NYSE:BFS). This group of stocks' market caps are similar to NHC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHCO,9,25056,-2 DNOW,11,66317,0 MEI,11,108516,3 BFS,12,43790,3 Average,10.75,60920,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $61 million. That figure was $64 million in NHC's case. Saul Centers Inc (NYSE:BFS) is the most popular stock in this table. On the other hand City Holding Company (NASDAQ:CHCO) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks National HealthCare Corporation (NYSEAMERICAN:NHC) is even less popular than CHCO. Hedge funds dodged a bullet by taking a bearish stance towards NHC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately NHC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); NHC investors were disappointed as the stock returned 3.8% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.