Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. 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 Penn National Gaming, Inc (NASDAQ:PENN).
Penn National Gaming, Inc (NASDAQ:PENN) investors should pay attention to a decrease in enthusiasm from smart money in recent months. PENN was in 18 hedge funds' portfolios at the end of December. There were 24 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.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's check out the key hedge fund action regarding Penn National Gaming, Inc (NASDAQ:PENN).
Hedge fund activity in Penn National Gaming, Inc (NASDAQ:PENN)
At Q4's end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PENN over the last 14 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Blue Harbour Group held the most valuable stake in Penn National Gaming, Inc (NASDAQ:PENN), which was worth $41.4 million at the end of the third quarter. On the second spot was Scopus Asset Management which amassed $18.8 million worth of shares. Moreover, 1060 Capital Management, Marshall Wace LLP, and Shellback Capital were also bullish on Penn National Gaming, Inc (NASDAQ:PENN), allocating a large percentage of their portfolios to this stock.
Due to the fact that Penn National Gaming, Inc (NASDAQ:PENN) has experienced a decline in interest from the smart money, it's easy to see that there lies a certain "tier" of funds that elected to cut their full holdings in the third quarter. At the top of the heap, Paul Reeder and Edward Shapiro's PAR Capital Management sold off the largest position of the 700 funds tracked by Insider Monkey, valued at an estimated $61.2 million in stock. Pasco Alfaro / Richard Tumure's fund, Miura Global Management, also dropped its stock, about $28.8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 6 funds in the third quarter.
Let's now review hedge fund activity in other stocks similar to Penn National Gaming, Inc (NASDAQ:PENN). We will take a look at Pan American Silver Corp. (NASDAQ:PAAS), BlackLine, Inc. (NASDAQ:BL), Fox Factory Holding Corp (NASDAQ:FOXF), and Simmons First National Corporation (NASDAQ:SFNC). All of these stocks' market caps match PENN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAAS,15,152840,0 BL,13,206865,0 FOXF,11,47318,1 SFNC,7,12428,-2 Average,11.5,104863,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $105 million. That figure was $103 million in PENN's case. Pan American Silver Corp. (NASDAQ:PAAS) is the most popular stock in this table. On the other hand Simmons First National Corporation (NASDAQ:SFNC) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Penn National Gaming, Inc (NASDAQ:PENN) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately PENN wasn't nearly as popular as these 15 stock and hedge funds that were betting on PENN were disappointed as the stock returned 13% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.