Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Penn National Gaming, Inc (NASDAQ:PENN) changed recently.
Penn National Gaming, Inc (NASDAQ:PENN) was in 24 hedge funds' portfolios at the end of September. PENN investors should be aware of a decrease in hedge fund sentiment in recent months. There were 27 hedge funds in our database with PENN positions at the end of the previous quarter. Our calculations also showed that PENN isn't among the 30 most popular stocks among hedge funds.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 18 percentage points since May 2014 through December 3, 2018 (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.
Let's take a look at the new hedge fund action encompassing Penn National Gaming, Inc (NASDAQ:PENN).
Hedge fund activity in Penn National Gaming, Inc (NASDAQ:PENN)
Heading into the fourth quarter of 2018, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PENN over the last 13 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Millennium Management held the most valuable stake in Penn National Gaming, Inc (NASDAQ:PENN), which was worth $79.3 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $78.5 million worth of shares. Moreover, PAR Capital Management, Marshall Wace LLP, and Miura Global Management were also bullish on Penn National Gaming, Inc (NASDAQ:PENN), allocating a large percentage of their portfolios to this stock.
Seeing as Penn National Gaming, Inc (NASDAQ:PENN) has witnessed declining sentiment from hedge fund managers, it's easy to see that there was a specific group of hedge funds who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Alexander Mitchell's Scopus Asset Management cut the largest investment of the 700 funds watched by Insider Monkey, totaling about $33.6 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund sold off about $22.4 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Penn National Gaming, Inc (NASDAQ:PENN) but similarly valued. We will take a look at Applied Industrial Technologies, Inc. (NYSE:AIT), Brookfield Business Partners L.P. (NYSE:BBU), Enerplus Corp (NYSE:ERF), and iShares MSCI ACWI ex US ETF (NASDAQ:ACWX). This group of stocks' market values are similar to PENN's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AIT,24,165922,1 BBU,6,55418,1 ERF,17,175131,2 ACWX,7,35720,2 Average,13.5,108048,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $108 million. That figure was $405 million in PENN's case. Applied Industrial Technologies, Inc. (NYSE:AIT) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 6 bullish hedge fund positions. Penn National Gaming, Inc (NASDAQ:PENN) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. In this regard AIT might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.